Nov 10, 2004

Fed Day! Fed Day!

Excerpts from the Dow Jones news wire:

Most forecasters believe the Fed will update its language to indicate that
in the wake of the very strong October jobs data, the employment sector has
improved. At the September policy meeting, the Fed said "labor market conditions
have improved modestly," and observers believe that now, that final word will be
chopped. Meanwhile, while the Fed said in September that "output growth appears
to have regained some traction," analysts also believe things have improved
enough to speak of that growth in more enduring terms.

In August, the FOMC blamed the unexpected slowing in growth on rising
energy prices. Fed officials said repeatedly that they expected the rise in
energy to be transitory, and while their timetable was a bit off, oil prices
have been moderating of late. In September, the Fed again noted a "rise" in
energy prices, which Matus now believes will be reidentified as a "past surge."

Where there's a bit less clarity, it's on how the Fed will approach its
inflation views. Few forecasters think the central bank's so-called balance of
risks statement will be changed. But there's fairly broad-based support for a
move that would see the Fed note some modest level of concern about price
pressures, especially in the wake of the consumer price index for September,
which showed an unexpectedly strong gain.

Perhaps the part of the Fed's policy statement that gets the most attention
is the third paragraph of what's become a very ritualized document. In that
section the Fed's balance of risks between growth and inflation is found. But
more importantly, it's the spot where policy makers have been signaling their
outlook for monetary policy. Since May, the Fed has been saying that "policy
accommodation can be removed at a pace that is likely to be measured," even as
they've made that statement contingent on the course of economic data.
Markets have long interpreted that phrase to mean the FOMC would lift interest
rates at each of its policy meetings for an extended period, a view Fed
officials have clearly been comfortable with. But until the release of the jobs
numbers last Friday, there's been a growing view that the FOMC might skip the
December rate hike- some Fed officials themselves indicated a pause in the rate
hike campaign might be in the offing. But the employment data washed away many
of those expectations, and a large number of major investment banks now expect
the Fed to also lift rates in December, so look for a repeat of the "measured
pace" language.

I tend to think the statements lean towards contentment with growth resuming and inflation remaining low. I would guess no acknowledgement of changing energy prices and the word measured may be dropped.

The market is now positioned for a December rate hike and to me the risk is that the statement by not confirming this view will lead to a reduction of the market probability. We shall see at 1:15.

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