Most impotantly, the minutes softened the wording of the latest FOMC statement that had led markets to the conclusion that the FOMC will initiate at least another two rate hikes this year, pushing the Fed Funds rate to my lower target of 5.25%. But the Fed avoided a complete retreat from its inflationary fears.
"Some members expressed concern that retention of the phrase "some further policy firming may be needed to keep the risks...roughly in balance" could be misconstrued as suggesting that the Committee thought that several further tightening steps were likely to be necessary."But I would not share into happy mood of the WSJ where Greg Ip prays for an end of the current rate cycle that has kept rates still well below long-term averages. It looks as there is a growing number of FOMC members that worry more about inflation than a cooling of the housing market, the following quote indicates.
"Some participants held that core inflation and inflation expectations were already toward the upper end of the range that they viewed as consistent with price stability, making them particularly vigilant about upside risks to inflation, especially given how costly it might be to bring inflation expectations back down if they were to rise."Noting a "brisk" and broad based economic expansion despite signs of a cooling housing market in Q1 2006 the FOMC expects economic activity to decline to a slower pace in the next quarters, continuing a trend of suprisingly weak GDP growth in Q4 2005.
"Meeting participants saw both upside and downside risks to their outlook for expansion around the rate of growth of the economy's potential. In the housing market, for instance, some downshift from the rapid price increases and strong activity of recent years seemed to be underway, but the magnitude of the adjustment and its effects on household spending were hard to predict."The Fed continues to stress the point that inflation expectations remain well anchored but equally stresses the fact that high oil and energy prices may seep through into core inflation.
"In their discussion of prices, participants indicated that data over the intermeeting period, including measures of inflation expectations, suggested that underlying inflation was not in the process of moving higher. Crude oil prices, though volatile, had not risen appreciably in recent months on balance, and a flattening in energy prices was beginning to damp headline inflation. In addition, core consumer inflation was flat or even a bit lower by some measures. Some meeting participants expressed surprise at how little of the previous rise in energy prices appeared to have passed through into core inflation measures. However, with energy prices remaining high, and prices of some other commodities continuing to rise, the risk of at least a temporary impact on core inflation remained a concern."Ladies and Gentlemen, place your bets. Mine still lie with Fed Funds between 5.25% and 5.75% by yearend as record energy and industrial resources prices will keep inflation elevated. $3 gasoline will act like an additional tax on consumers, further endangering private consumption. Higher mortage and credit card rates will add to the cost burden of Joe Average too.
Economic growth may still remain on a nominally good-looking path. But I guess everyone of us could create an artificial upturn by feeding taxpayer's money into the defense sector and balloning the number of government employees while financing it all the time with money borrowed from foreigners and the Fed which holds just below 10% of total federal debt, effectively monetizing it.
Investing in the US markets has become a fly-by-night adventure anyway since the Fed ceased publication of M3 a month ago. We have no way to check the speed of the money printing press anymore. Having watched the James Bond movie "Goldfinger" before it was interesting that the head of the Bank of England taught Sean Connery "that gold is the determinant of the value of the pound and the dollar." That was in 1964. In my opinion nothing has changed since.