Fed Statement Dissection

Fed statement contains the latest decision regarding changes to US short-tem interest rate (“fed funds rate”), their take on the economic conditions that affected their decision, and important clues on what the next rate decision will be. The market goes through the statement with a fine tooth comb and magnifying glasses. One addition or deletion of a single word could unlock the secret of future Fed interest rate decisions and cause the market to move hundreds of pips.

I’ve compared the October statement versus the today’s and noted the changes and added my comments below:

Paragraph Comments
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent. This is the fourth-straight meeting with no change in monetary policy. From June 2003 to June 2006, there was 17 straight rate hikes.
Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters. Everything highlighted here is new to the statement.
Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Zzzzzzz. Nothing new here. Their view on inflation still hasn’t changed from the last statement. They still believe inflation will cool as the economy cools.

The Fed believe their monetary policy porridge is just about riiiight (keep rates unchanged). Inflationary pressures aren’t hot enough to require a rate hike and economic growth isn’t cool enough to require a rate cut. Fedilocks seems content at the moment.

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. Blah blah. While everything that is highlighted is green is new, it looks like they just found another way to say the same thing…that future interest rate decision will be based on incoming data.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; William Poole; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting. Lacker is a maverick until the end. He’s still the only one in favor of a rate hike again. Too bad/ Due to Fed’s rules that shift four of the five votes of Fed presidents on the 12-member voting committee, this is the last time he’ll be able to vote untill 2009.