The Fed holds the line on rates and frets about jobs and disinflation …
As we expected, the Federal Reserve held its federal funds rate target at 1% at the September 16 FOMC meeting, and the decision was unanimous. The FOMC noted that spending in the economy had been “firming” since the previous (August 12) meeting, that the labor market had been “weakening,” and that business pricing policy as well as increases in core consumer prices had remained “muted.” This, of course, is the conundrum discussed above.
The public statement issued by the FOMC retained the three-part risk assessment that was introduced at the May 6 FOMC meeting. The FOMC now gives separate risk statements regarding real economic growth and inflation prospects, and then gives an overall assessment that presumably tells us something about monetary policy “ leanings” for the future.
In this case, the FOMC said that the upside and downside risks to sustainable economic growth were “roughly equal” but that the probability of an unwelcome fall in inflation from its already low level “exceeds that of a rise in inflation.” Indeed, the FOMC said that the risk of inflation becoming undesirably low (i.e., threatening outright deflation) “remains the predominant concern for the foreseeable future.”
The weight of the disinflation/deflation concern led the FOMC to conclude that “policy accommodation can be maintained for a considerable period.” NAHB’s forecast shows a stable federal funds rate until mid-2004, followed by gradual increases toward monetary neutrality over the following two years. The financial markets seem to share this general assessment, as the futures market for federal funds shows only minor probabilities for a policy change prior to mid-2004.
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