Wednesday, March 21, 2007

An Optimistic Reading

The markets today seem to be giving today's FOMC's statement a rather optimistic reading:
March 21 (Bloomberg) -- The Federal Reserve kept the benchmark U.S. interest rate at 5.25 percent and unexpectedly abandoned its tilt toward higher borrowing costs.

"Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth," the Federal Open Market Committee said today in Washington. While inflation is "elevated" and the "predominant" concern, the statement dropped a reference to "additional firming," language used since June, the last time the Fed lifted rates.

Policy makers said recent economic indicators have been "mixed" and acknowledged the persistent downturn in housing. Nevertheless, they repeated that "the economy seems likely to continue to expand at a moderate pace over coming quarters."

Bonds and stocks rallied as some traders read the change as a signal that the Fed will consider cutting rates by the June policy meeting. Other economists said the new wording doesn't necessarily mean a reduction is imminent.

"It does not appear the committee is prepared to consider easing; rather, they are ruling out tightening," said Chris Low, chief economist at FTN Financial in New York. "The FOMC concedes a decidedly gloomier economic picture in March than in January, but continues to worry" about inflation.
I think that Chris Low's reading at the end of this excerpt is spot on: today's statement may indicate that a rate hike is not in the offing, but does nothing to indicate a rate cut any time soon. That's why I think the markets' exuberant reaction (or should that be "irrationally exuberant"?) today will likely be largely undone tomorrow, as a more sober assessment concludes that since we already knew that a rate hike was not likely, this was not really news.

No comments:

Post a Comment