Curious reaction from both markets and pundits to yesterday’s statement from the FOMC accompanying the decision to boost the fed funds rate another 25 basis points.
Five- and ten-year yields are up 10 basis points from Monday, and Macroblog has an impressive summary of people who were worried about what the Fed’s latest statement implies for what may lie ahead.
Here’s what the Fed actually said:
The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors. Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace. As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.
The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.
The threat of more hikes is given emphasis by the opening paragraph, which baldly states that the Q4 slowdown was “temporary” and that growth has “rebounded strongly”, though it “appears likely to moderate”.
So what about stating baldly that:
The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors.
Isn’t the statement, like, true? Hadn’t every fair-minded analyst already concluded that 2006:Q1 GDP growth is going to look better than 2005:Q4? Or is it just unsettling to hear the Fed say plainly what everybody is already thinking? And what’s wrong with concluding that:
further policy firming may be needed.
That’s true, too, isn’t it? The Fed is saying that, if it sees more evidence of inflation picking up, it will raise rates higher. Isn’t that what everybody expects them to do? They didn’t say they’re committed to do so, rather that they’re watching the incoming data to see whether it proves necessary.
I think that one of the sharpest differences between new Fed Chair Bernanke and his predecessor Alan Greenspan will prove to be their communication skills. Greenspan seemed to think that it was his duty to speak obscurely, making sure he covered all the bases and giving mere hints of where things were really headed. People accordingly tried to decipher his Delphic pronouncements, running for cover when there seemed to be a hint of something newly negative.
To me, this was a very striking contrast with Bernanke’s recent speech about the yield curve. This is a marvelous read, which I view as a completely open window into how Bernanke is interpreting current developments, openly offering his hypotheses along with his doubts, and the evidence for and against.
If you read the Fed’s latest statement not as an arcane set of tea leaves that have to be deciphered, but rather as a straightforward statement of where we stand that should be taken at face value, then I don’t see anything to be alarmed about. When people ask, “what does Bernanke mean?”, my first instinct is, “exactly what he says.”
You might come to like it, once you get used to it.