FOMC Takes a Dovish View Despite Inflationary Risks

Thursday, June 28, 2007

In a widely expected non-move the Federal Open Market Committee (FOMC) decided unanimously to keep the Fed Funds rate unchanged at 5.25%, extending the grace period for overstretched consumers/debtors who are fearing the times of painful mortage rate-adjustments. Such adjustments are now upheld for at least another quarter.
The brief statement says:
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters.
Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.
In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

It seems the doves are flying high at the Federal Reserve despite a sky full of warning signs. Recent headline inflation figures and a revision of the deflator from 4.0% to 4.2% for today's final GDP growth figures for Q1 2007 from the Bureau of Economic Analysis seem to prove the FOMC's expecations that inflation will not moderate as hoped. Q1 growth was revised to an annualized rate of 0.7% (0.6%.)
With oil futures creeping above $70 such hopes seem far-flung anyway.
Conclusion: The FOMC seems to be more concerned about choking a sharply slowing economy than fighting the worrisome uptrend in consumer prices that are poorly reflected in the Fed's favored gauge, the highly hypothetical "core" rate of inflation that may help complacency at the Fed's part but in no way mirrors consumers daily experiences at the cash register.
The continued hold on rates may be a temporary relief at first sight, but the easy monetary policy will only prolong the credit financed shopping spree of consumers who are already indebted up to their ears.


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