FOMC: Nothing Done
The Federal Open Market Committee unanimously agreed to keep the federal funds rate at 5.25% -- that's exactly where its been since the June 2006 FOMC.
The Fed statement said the economy "slowed" versus prior statements in the first part of the year. Previously,the Fed described the economy as "mixed."
The Fed repeated that the housing adjustment is "ongoing;" the likeliest scenario remains "moderate" growth; core inflation remains "somewhat elevated" but should come down. Also of note: High resource utilization remains an inflation threat.
~~~
The Board of Governors of the Federal Reserve System has issued the
following press release: FOMC statement
WSJ's Parsing the FOMC Statement
click for larger graphic
Wednesday, May 09, 2007 | 06:30 PM | Permalink
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Did you put up the graphic twice in homage to the repeated phrase in the statement? "Voting for the FOMC monetary policy action were:Voting for the FOMC monetary policy action were:" (from The Mess That Greenspan Made")
Posted by: Nikki | May 9, 2007 7:18:04 PM
This is like reporting that the statue in Central Park did not move again today.
When the object of the report has no choice, the decision ain't really news, now is it?
Posted by: Winston Munn | May 9, 2007 7:21:56 PM
Something very big was done.
They said that they won't lower rates despite a slowing economy.
This is a dramatic statement.
Instead of fighting inflation, Fed policy is now to allow the real economy to slow until it takes down the excesses in the financial markets.
They have now publicly taken a stance against liquidity and speculation. The inflation talk, again, is just a diversion.
I think they should have raised rates, but this is the next best thing.
Posted by: super-anon | May 9, 2007 8:26:04 PM
Here are some interesting figures.
The Fed's power is to manipulate excess reserves. The largest single day drain in the last year was $20B. Typcially, the infusions and drains run in the $5-10B range.
FCBs, however, hold $2.2 TRILLION in U.S. debt, and $702 billion in Fannie Mae and Freddit Mac paper alone - 49% of the total paper of these GSEs.
Now I ask - who again is in charge?
Question for Eclectic: what power will the FCBs acquire when they become "majority stockholders" of GSE debt?
Posted by: Winston Munn | May 9, 2007 8:47:13 PM
BTW, for some context, read this:
http://www.msnbc.msn.com/id/18577865/
The housing market needs lower rates right now. What do you think is going to happen to housing starts and construction employment given the homebuilder sentiment expressed above and the Fed decision not to lower rates?
Perhaps I'm giving Bernanke too much credit, but this is starting to look more like a Paul Volcker style "exorcism by recession" as opposed to a Greenspan easy money style coddling.
Posted by: super-anon | May 9, 2007 8:50:15 PM
What you would expect when one is between a rock and a hard place although to me what's most unbelievable is that interest rates are still extremely low in an environment where we have double digit credit growth, and yet the Fed can't bring itself to face the rampant inflation in all asset classes and move a friggin' quarter point. Breathtaking.
Posted by: SPECTRE of Deflation | May 9, 2007 9:01:35 PM
Of course the Fed can't raise rates - have you looked at bond yields lately? Does anyone really believe that a $45 TRILLION worldwide bond market gives a rats ass what Bernanke, with only his few billions to toss around, does with Fed rates?
Has anyone looked at the housing bubble in Brittain? This money supply problem is global and it is massive - the U.S. is a small-time player compared to the rest.
However, I think super-anon is on the right track and his statement is what I alluded to in another post - that Ben is using the only bullet in his gun by holding rates, hoping to slowly contract the money supply.
Note to Ben: Ain't gonna happen.
Posted by: Winston Munn | May 9, 2007 9:21:34 PM
Note to Ben: Ain't gonna happen.
I think we need lots and lots of rate hikes, however the only reason I think keeping rates steady might be enough is because of what I'm seeing in my home town.
This morning they just announced the shutdown of three auto-related manufacturing plants in June (this is on the East coast BTW). Something I believe is related to the housing bust.
And the local housing market is turning into an absolute slaughter. 5x as many houses for sale as 18 months ago. And they're selling new 2900 sq/ft for what 1800 sq/ft condos were selling for in Aug 2005.
Maybe that's not representative of what's going on elsewhere, but here the real economy is collapsing along with housing.
People I work with are getting scared. It looks really really bad.
Posted by: super-anon | May 9, 2007 9:48:14 PM
super-anon... you have a link on those shutdowns... don't have to tell us where you live or details... just local media reports if you can find them (best if NOT subscription).
I'm in mfg & try to keep track of that kind of stuff but NOT east coast.
TIA.
Posted by: dryfly | May 9, 2007 10:24:51 PM
Super-anon:
I've also seen that NY prices are starting to slide.
I said this the other day and will say it again - when Goldman Sachs starts whining for rate cuts the recession has begun.
It would come as no shock to me to see that future revisions show the second quarter of 2007 is when the 2007-2009 recession started.
And in 2009-2010 things may get even worse. Why? Peak oil.
Consider this from James Kunstler of The Daily Reckoning: "Me, I'm keeping my eye on things like the production figures coming out of Mexico, the North Sea, and the Kingdom of Saudi Arabia. They're all sliding down. Mexico is especially interesting because it is our Number 3 source of oil imports and its production is crashing so hard that a couple of years from now it may not be able to send us a single drop of oil."
No oil=no enonomy.
I seem to be a pretty consistent doom and gloomer, but this is the first time in my 56 years of life that I have adopted this attitude. I never bought any of the doom and gloom books or listened to the "gold bug" kooks.
But, you know, Krakatoa doesn't erupt every day; a tsunami does crash into Indonesia weekly; and a "perfect storm" doesn't menace New England each month. It takes time for these types of forces to build.
There is valid reason now to be concerned, and to turn a blind eye to the potential is to me to be somewhat naive.
When the ocean unexpectedly recedes and uncovers previously sunken pieces of eight, it isn't the time to rush to the beach and try to get rich - unless you just want an expensive funeral.
Posted by: Winston Munn | May 9, 2007 10:36:37 PM
Does anyone know what data points they are using when they say inflation will likely moderate over time? They've been saying that since last May and I don't think food prices were part of the mix last summer.
Ethanol effect on food prices is a recent development (and not a small one either) and I'm not sure what they are seeing to suggest core inflation will moderate over time.
If input prices were dropping, I could understand the theory that overall price increases could soon moderate. But with the value of the dollar so low and food and energy prices rising, I’m not sure how those dots are being connected.
Maybe it’s semantics at this point, because the inflation I see and pay are not the same thing as the inflation they report. So maybe we need to have two categories of inflation in our discussion: the kind that is paid by consumers/businesses and the other kind that is reported by the BLS.
Posted by: dave | May 10, 2007 12:47:10 AM
Winston,
There is a reason oil is having a problem getting above $70. That is about the price point that competing technologies become lucrative. One that jumps immediately to mind is coal gasification technology
Peak oil? That is so last year. Don't you know the current fad crisis is SARS, I mean bird flu.....uhhhh wait a minute, I mean global warming. Yeah, that's it, global warming.
We need to save the planet or tens of thousands of humans will starve to death daily. Wait a minute, tens of thousands of humans are starving to death for want of a few dozen billion$ today!
Where is that on the 'crisis' propaganda blitz schedule? I don't see it anywhere in the media guide
Posted by: DavidB | May 10, 2007 1:03:48 AM
Super-anon, where does it say they will not lower rates......just asking as I can't see it.
Posted by: Si | May 10, 2007 1:19:05 AM
DavidB, you sure are flippant about energy. Leads me to believe you don't understand it very well.
Coal gassification requires billions of dollars of capital costs. A CTL plant announced tomorrow would not be ready for years. Years with an S. And you think this is what is keeping the price of oil per barrel capped at $70. LOL
As for peak oil, I suggest you do some more research. SARS is a media crisis. Peak oil is not even on the radar of the MSM. Not for long. If you care to understand the issues surrounding oil depletion, I recommend starting at theoildrum.com ... contributors there are well informed, and include petroleum engineers and geologists. Pish posh it all you want, but don't be surprised when slightly more informed punters like me ridicule your ignorance.
Posted by: Momo Fader | May 10, 2007 4:01:34 AM
DavidB,
>> We need to save the planet or tens of thousands of humans will starve to death daily. Wait a minute, tens of thousands of humans are starving to death for want of a few dozen billion$ today!
>> Where is that on the 'crisis' propaganda blitz schedule? I don't see it anywhere in the media guide
Some news outlets cover these stories. Most don't, because for many "viewers" anything "negative" might be a reason for them to turn the channel to something fun. It's safer to run sports and weather segments each longer than national news.
Posted by: wunsacon | May 10, 2007 5:05:26 AM
DavidB:
How much of its imported oil does the U.S get from Mexico? Answer 1/3. It follows that this from Russ Winter will have an impact: "PEMEX made it official. Production from Mexico’s largest oilfield, Cantarell, fell from 1.99 million b/d in January 2006 to 1.44 million b/d in December.
Mexican oil analyst, David Shields, expects the field’s output to drop another 600,000 barrels a day by the end of this year. He says that Pemex will likely increase output by 200,000 barrels a day at other fields — leaving the country with a net decline of 400,000 barrels a day by year’s end."
Production from other fields around the world is also declining.
Posted by: Winston Munn | May 10, 2007 8:53:26 AM
From the WSJ:
Personal debt has reached a record $2.6 trillion. According to the Organization for Economic Cooperation and Development, U.K. household debt as a percentage of annual disposable income hit 159% in 2005 -- the last year for which data is available -- compared with 135% in the U.S.
I noticed this while visiting some sites this AM. Consumers in America were spending 130% of DI before the depression. Today we stand at 135%, but the Brits have us beat by a country mile. There's no question in my mind that post 2005 the Brits continued their spending ways, and today the figure could be even higher and probably is. Globflation is here, and this will all end very badly.
Posted by: SPECTRE of Deflation | May 10, 2007 8:53:29 AM
"Does anyone know what data points they are using when they say inflation will likely moderate over time? They've been saying that since last May and I don't think food prices were part of the mix last summer."
dave, that is a very interesting question. There is only one reason that the Fed could make that statement. Since they have not raised rates to reduce core inflation, they are assuming that something else will reduce it. I wonder what?
Posted by: wally | May 10, 2007 9:08:25 AM
"Does anyone know what data points they are using when they say inflation will likely moderate over time? They've been saying that since last May and I don't think food prices were part of the mix last summer."
dave, that is a very interesting question. There is only one reason that the Fed could make that statement. Since they have not raised rates to reduce core inflation, they are assuming that something else will reduce it. I wonder what?
Posted by: wally | May 10, 2007 9:08:37 AM
What strikes me is the focus on the Fed. I'm not that old, but in the 1980s I don't recall the breathless, hang-on-every-word attention that Fed meetings get today. Something like this might have been a blurb in the business section. Or am I misunderremembering?
Posted by: Nova Law | May 10, 2007 9:13:11 AM
It seems, IMHO, that the Fed is waiting for rents to come down when all the housing/condo inventory hits the rental market. That, they figure, will bring down the housing component of inflation numbers. That is the only thing they are hanging their hats on.
Posted by: js | May 10, 2007 9:54:55 AM
Dave,
To steal a quote from Frank Zappa: "It's you and three hundred million of your friends, all standing in shit up to your chins, screaming 'don't make a wave!'"
THAT is why the Fed "sees inflation moderating." It's totally fallacious, but if they told the truth, the market might go down more than five points for more than five minutes.
Posted by: John | May 10, 2007 10:19:13 AM
I think they should have had one or two people vote for a rate increase. That would have moderated the speculation without requiring them to raise rates (which would cause housing to fall faster).
Their statements about expecting inflation to moderate are probably based on expectations of a recession. Those tend to moderate inflation pretty well.
Posted by: jkw | May 10, 2007 10:37:57 AM
Nova...when I started in the business (early 80's) we hung on EVERY money supply report, fwiw.
Posted by: Fred | May 10, 2007 10:46:22 AM
jkw,
That's how I see it, too: they expect a recession and they are saying as much with their actions but not their words.
You can't continually say that something is out of your confort range and continue to endless be comfortable with it... but they have.
Posted by: wally | May 10, 2007 10:55:21 AM
