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Instant Insight: Federal Reserve Leaves Rates Unchanged, Remains Hawkish

By Kathy Lien
08 August 2007 11:00 GMT

Although the Fed did add that the “downside risks to growth have increased,” the mildly cautionary tone in the statement indicates that the problems have yet to become severe enough for the Fed to stop worrying about inflation and start focusing on growth.  They believe that “solid growth in employment and incomes” will help to drive further growth in the quarters to come. 

 

The mild dollar rally and slight bump up in the yield curve indicates that not all traders believe them.  The Fed needs more evidence than the few bankrupties and blowups that we have seen thus far to shift their tone.  Unfortunately the rest of us know that there is never just one cockroach in the closet.  More adjustable rate mortgages will be repriced over the next 6 months, which means the risk of defaults will continue to rise.  Bernanke and Team have left themselves with the flexibility to act if necessary.  If they plan on lowering rates by the end of the year like the market has decided for them, then they will have to notch down their degree of hawkishness next month. 

 

Comparing the FOMC Statements

 

August 7, 2007

 

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

 

Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.

 

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.

 

Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information.

 

June 28, 2007

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

By Kathy Lien, Chief Strategist of DailyFX.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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08 August 2007 11:00 GMT