The Fed’s Statement

To no one’s surprise, the Fed elected to raise interest rates by another 0.25% this afternoon. The real information that everyone was waiting for was some indication about whether the Fed seems more worried about the apparent recent slowdown of the US economy, or gradually increasing inflation measures. As it turns out, this afternoon’s statement seems to suggest that they’re slightly concerned about both.

Here’s the statement that was released at 2:15pm EDT today, compared to the previous statement:

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices. Labor market conditions, however, apparently continue to improve gradually. Though longer-term inflation expectations remain well contained, Pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices. Longer-term inflation expectations remain well-contained.

The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

The sections of the statement that I’ve boldfaced are additions from last month’s statement, while the portions struck out were in the last statement but not in this one.

One thing that the Fed is very good at doing, I think, is assembling the most complete picture possible of the current state of the US economy, using both quantitative and qualitative sources. And right now that picture seems to suggest to them that inflation has really picked up, and growth has really slowed. The Fed therefore seems to suggest that they see the US economy right now going through a classic case, albeit a mild one, of stagflation induced by an energy supply shock. But given the two conflicting problems (slower growth and higher inflation), the Fed statement also seems to be saying that their first responsibility is to take care of any incipient inflation problems, and hence keep increasing interest rates.


UPDATE: CR points out that the Fed has (very unusually) revised their statement to reinsert a sentence that had seemingly been deleted by mistake. Apparently, it is still the case that “Longer-term inflation expectations remain well contained.” I guess they realized that the original statement (missing the statement about inflation expectations) had sent a signal about inflation that they hadn’t intended. For an example, see my own comments above about the Fed’s growing inflation fears, which I now largely rescind.