• FOMC’s predominant concern is the “risk that inflation will fail to ease
as expected”
• Fed’s communication is consistent with the policy staying on hold and suggests that the Fed is a long way from easing
• We expect the hawkish bias to remain unaltered The tone of Fed’s communication remains consistent with a tightening bias
In the intermeeting period, economic data has come on balance on the soft side, especially data on business investment. However, concerns on downside risks to growth have not intensified significantly as consumption growth and job creation remain solid. In January, core inflation came on the high side of expectations; yet, this followed three straight months with low readings. Thus, after averaging to smooth monthly volatility, core inflation has eased in recent months, consistent with Fed’s view of a gradual decrease in underlying inflation. However, for the Fed the predominant risk is inflation and they remain focused on whether it will decline gradually or remain persistently above their comfort zone.
After Bernanke’s Testimony, futures markets assigned a 26% probability of a rate cut by September and discounted with a 86% probability a 5.0% fed funds rate by year-end. Now, discount a rate cut by September and anticipate a 4.75% fed funds rate by year-end with a 100% probability. The median of analysts expects the Fed will ease policy by 25bp in 2007. Meanwhile, Fed’s communication remains consistent with a tightening bias.
… Thus, we anticipate both the monetary policy wording and the balance of risks to remain unaltered Fed’s hawkish bias continues to suggest that tightening is more likely than easing, consistent with their belief that the risk of inflation remaining too high is greater than the risk of economic growth being too low. The Fed will continue to be patient until data clearly points to either a sharper deceleration or persistently higher core inflation. Although economic growth will be slightly below potential, markets will continue tight –with a relatively stable unemployment rate–, exerting pressures on resources. Moreover, with core inflation above Fed’s comfort zone for most of 2007 and with upside risks exceeding downside risks, the FOMC will keep its hawkish bias. Therefore, in the absence of a sharper deceleration in GDP growth, the Fed will maintain its extended pause. The monetary policy wording i.e, the hawkish bias, will remain unaltered in next meeting’s statement.
• Fed’s communication is consistent with the policy staying on hold and suggests that the Fed is a long way from easing
• We expect the hawkish bias to remain unaltered The tone of Fed’s communication remains consistent with a tightening bias
In the intermeeting period, economic data has come on balance on the soft side, especially data on business investment. However, concerns on downside risks to growth have not intensified significantly as consumption growth and job creation remain solid. In January, core inflation came on the high side of expectations; yet, this followed three straight months with low readings. Thus, after averaging to smooth monthly volatility, core inflation has eased in recent months, consistent with Fed’s view of a gradual decrease in underlying inflation. However, for the Fed the predominant risk is inflation and they remain focused on whether it will decline gradually or remain persistently above their comfort zone.
After Bernanke’s Testimony, futures markets assigned a 26% probability of a rate cut by September and discounted with a 86% probability a 5.0% fed funds rate by year-end. Now, discount a rate cut by September and anticipate a 4.75% fed funds rate by year-end with a 100% probability. The median of analysts expects the Fed will ease policy by 25bp in 2007. Meanwhile, Fed’s communication remains consistent with a tightening bias.
… Thus, we anticipate both the monetary policy wording and the balance of risks to remain unaltered Fed’s hawkish bias continues to suggest that tightening is more likely than easing, consistent with their belief that the risk of inflation remaining too high is greater than the risk of economic growth being too low. The Fed will continue to be patient until data clearly points to either a sharper deceleration or persistently higher core inflation. Although economic growth will be slightly below potential, markets will continue tight –with a relatively stable unemployment rate–, exerting pressures on resources. Moreover, with core inflation above Fed’s comfort zone for most of 2007 and with upside risks exceeding downside risks, the FOMC will keep its hawkish bias. Therefore, in the absence of a sharper deceleration in GDP growth, the Fed will maintain its extended pause. The monetary policy wording i.e, the hawkish bias, will remain unaltered in next meeting’s statement.
