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FOMC Minutes

Mon, Feb 19 2007, 15:08 GMT
by Marcial Nava

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FOMC Minutes (January 30/31th meeting, Wednesday 2.00 pm)

In their last statement, FOMC members left the monetary policy paragraph virtually unaltered. The tightening bias was retained signaling that Fed officials continued focused on inflationary risks.

We think that the balance of risks remains unchanged with the risks of inflation becoming too high still greater than the risk of economic growth becoming too slow. Up to now, activity and prices data have been consistent with economic growth expanding solidly through moderating and inflationary pressures easing gradually.

Employment creation moderated and the unemployment rate rose in January. Manufacturing activity contracted in January; however, positive readings on new orders together with a sharp liquidation of inventories suggest that production could rebound in coming months. From the prices side, overall inflation has eased reflecting lower energy princes, while core inflation has diminished gradually as expected. In his testimony to the Congress, chairman Bernanke noted that: “So far, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing of core inflation”. We maintain our forecast of an extended pause in monetary policy with the Fed Funds rate at 5.25%.

Headline CPI & Core (January, Wedenesday 8.30 am)

Forecast: 0.1, 0.2% Consensus: 0.1, 0.2% Prior: 0.5, 0.2%

We expect headline CPI to ease to 0.1% in January, reflecting a drop in gasoline prices. Prices at the pump averaged $2.2 per gallon in January from $2.4 per gallon during the previous month.

Excluding energy, consumer prices could have increase by 0.2% in January from 0.2% in December, with the twelve-month change steady at 2.6%. Core inflation will remain high in coming months before easing thereafter.

Index of Leading Indicators (January, Wednesday 10.00 am)

Forecast: 0.2% Consensus: 0.2% Prior: 0.3%

We expect the LEI index to improve further in January boosted by lower unemployment insurance claims, a rebound in consumer’s optimism, solid gains in the stock market and an increase in the interest rate spread. These developments are likely to be partially offset by the decrease in the vendor performance component together with an expected declined in building permits and durable goods orders. Thus, we look for a 0.2% increase in the overall LEI index following a 0.3% gain in December. This is equivalent to a 0.2% decline from the level of a year earlier suggesting that economic activity is moderating.

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Published on  Mon, Feb 19 2007, 15:12 GMT

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