The Fed Goes to Five

The FOMC (the interest rate-setting committee at the Fed) raised the Federal Funds rate to 5.0% today. Here’s the important bit of the accompanying statement:

Economic growth has been quite strong so far this year. The Committee sees growth as likely to moderate to a more sustainable pace, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.

The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information.

For many successive meetings (i.e. most of 2004 and 2005) the Fed’s statement was almost unchanged. But over the past two meetings the statement has decidedly evolved, and now can fairly be interpreted as signalling the end of certainty regarding further future interest rate hikes. Put another way, while the FOMC could still raise rates a bit higher, I think that this statement now suggests that they will only do so if they get more signals that inflation is rising.

Regardless of how you interpret this specific statement, however, one thing seems sure: it will be a lot more interesting (and difficult) to try to guess what the FOMC is going to do to interest rates over the next few months than it has been at any time in the past couple of years.