Merk Investments: FOMC Statement
The FOMC choose to hold the federal funds rate steady at 2.0% for the second straight meeting. The committee sought to balance both growth and inflation concerns by adopting a balance of risks with a slight tilt in the hawkish rhetoric on the pricing environment. The language inside the statement retained a tone that expressed confidence that the accommodative monetary policy of the past year will be sufficient to promote moderate growth but not cause inflation expectations to become unmoored.
Although, the no vote by Dallas President Richard Fisher represented the eight straight dissent by a committee member, the language in the statement directed at inflation was able to prevent the much discussed “triple dissent” bandied about in the market over the past week. The specific employment of the phrase “inflation has been high” and the attribution of its causes as the increase in the price of energy and some other commodities we found quite interesting. In our assessment it is a stealthy signal to the market that headline pressures to have crested, but provides a bit of plausible deniability of ever explicitly stating so.
The cautious optimism at the Fed and the victory dance taking place on Wall Street today may be a bit premature. The decline in demand for oil on a global basis will fade once energy inventories begin to be rebuilt later this fall. Moreover, the liquidity that the FOMC seems certain will foster moderate growth will also present firms that have seen profit margins collapse the opportunity to recapture some pricing power once the economy begins to recover in 2009. Thus, we think that the Fed will remain caught between what may be a modest improvement in headline pricing but a very difficult period ahead in the core that may prove just as difficult to push back down.
Joseph Brusuelas
Merk Investments
Chief Economist/VP Global Strategy
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