Fed Statement Sounds A Nuance More Hawkish

Tuesday, January 31, 2006

The FOMC has delivered a widely expected quarter percentage point hike in the Fed Funds rate. Comparing the statement with the one from December the only outstanding change is the dropping of the word "measured" and I may be in the minority when I interpret this as a move that gives room for rather more hawkish expectations. I arrive at this conclusion because the Fed still sees a solid economic expansion but emphasizes elevated energy prices.
As the Fed signalled "some further policy firming" instead of the measured pace announced in earlier statements I am ready to bet that the Fed Funds rate will not stop at the current 4.75% and that we will see Fed Funds zooming into the 5+ percentage range as there is no reason why energy prices - which have begun to eat into core inflation - should decline significantly, given the heightened geopolitical tensions surrounding Iran.
Incoming chairman Ben Bernanke and his voting members will have to digest a lot of economic data in the two-month period ahead of the next FOMC meeting on March 28 which will be followed by another two-month break. If inflationary pressures persist it is not unreasonable to keep the possibility of a 50 basis point hike on the radar, simply for the fact of the long time between the first 3 FOMC meetings of 2006 and no sign of softening commodity prices anywhere on the horizon.
Crude oil declined marginally today but the spike of gold above $570 per ounce is a clear indication that markets are anticipating higher inflation to come. The tensions with Iran are the single most important factor in this and they will not vanish in the next months. Expecting a strike against Iran this spring the Fed could find itself with a lot more inflation on hand than it can handle without sending stocks and bonds into a descending pattern.
Comparison Of The Last 2 Statements:
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-1/2 percent.
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-1/4 percent.
Although recent economic data have been uneven, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.
Despite elevated energy prices and hurricane-related disruptions, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.
The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.
The Committee judges that some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.
Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Jack Guynn; Donald L. Kohn; Jeffrey M. Lacker; Mark W. Olson; Sandra Pianalto; and Janet L. Yellen. (Regional Fed members rotated)
Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.
In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 5-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco.
In a related action, the Board of Governors unanimously approved a 25-basis point increase in the discount rate to 5-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

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