May 3, 2005

Fed Day

Mark Thoma put up a very interesting piece on what to expect out of the FOMC meeting a few days back. The gist was that the Fed will error towards tight money until Greenspan leaves to insure that inflation expectations remain low for his successor. That makes a lot of sense but it won't be much fun politically. It also talks a bit about the word "measured" and whether it stays or goes. My feeling on this is that last meeting's statement kept "measured" but led the market to foresee a 50 bp hike, making the word irrelevant.

The meeting minutes strengthened this view as the committee members dedicated a large amount of time to worrying that "measured" was being misinterpreted. The markets had been very clear that "measured" meant 25 bps at the next meeting but with the internal debate demonstrating unhappiness with such consensus the market will be more than happy to think something else or ignore the term altogether. More than a debate over the language the minutes indicated the committee is having a tougher time seeing 1-2 meetings ahead. I think it also indicated a widening spread of opinion about the balance of risks.

I would guess the statement today reflects more balance than the last one did and probably continued policy uncertainty. I would be surprised if they don't mention increased signs of weakness internationally and relief from commodity prices. Those statements will be weighed against the stronger inflation data and continued strength in housing. The data seems to have shifted away from growth and inflation since the last meeting. Anyway it will be 25 bps now and 25 bps expected for June but I bet more people begin looking for a pause thereafter.

That may be good news for domestic markets but I don't think dollar bulls will love it. I would guess we get more weakness against Asian currencies.

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