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At least part of the policy statement issued by the Federal Open Market Committee, the Federal Reserve's rate-setting arm, ran according to expectations at the close of its Mar. 18 meeting. The decision to leave rates unchanged and the tone of the press release matched our expectations at MMS International. The bottom line: The Fed sees no reason to ease now, given current expectations for improvement in the U.S. economy later in the year as geopolitical uncertainties dissipate. Yet the Fed signaled that it stands ready to ease if unfavorable geopolitical developments warrant such a move.
The committee threw the market a curve, however, by issuing a "no comment" on whether economic risks were weighted toward inflation or slowing economic growth. The release stated that "in light of the unusually large uncertainties clouding the geopolitical situation in the short run and their apparent effects on economic decisionmaking, the Committee does not believe it can usefully characterize the current balance of risks." The FOMC opted to punt instead, deciding to "refrain from making that determination until some of those uncertainties abate."
DISSENT IN THE RANKS? Actually, the committee's outlook, in the aggregate, has remained fairly consistent over the last several weeks, despite financial and commodity market volatility, heightened geopolitical tensions, and some disappointing economic data for employment, retail sales, and consumer sentiment. The post-meeting statement reiterated what Fed Chairman Alan Greenspan said in his semiannual testimony before Congress in February by stating that "the hesitancy of the economic expansion appears to owe importantly to oil price premiums and other aspects of geopolitical uncertainties."
Greenspan & Co. believes that when the fog of uncertainty lifts, as most analysts expect it will, "the accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide support to economic activity sufficient to engender an improving economic climate over time." The important point here is that much of the recent downside risk to the economy is seen as stemming from heightened geopolitical concerns, which are expected to be short-lived.
What's less clear is whether the FOMC's consensus outlook hides wide variations of opinion among the individual members, which may have been the reason for the "no comment" position. This statement suggests that various FOMC members may have disagreed on the current risk assessment, hence forcing the group's noncommittal stance. It also suggests the possibility that some Fed governors have a philosophical problem with providing a risk assessment.
WORD WATCH. The reason the FOMC moved from the "bias statement" to a "risk-assessment statement" back in early 2000 was that it did not want to be pinned down to a near-term "bias" for interest-rate policy. The rate-setters wanted it to be a longer-term view. In retrospect, it will be interesting to see whether current economic conditions pose a crisis for the purpose and process of risk assessment. Clearly the Fed is struggling with both.
We would also note that the Fed may have tried to signal easing risk over the short-term, due to geopolitical concerns, with the comment "in the current circumstances, heightened surveillance is particularly informative." This is very similar to the "monitor closely the evolving economic situation" phrase that the Fed used to signal the odds of intermeeting easings beginning in December, 2000. So while the Fed's current view of risks facing the U.S. economy may be clouded, its willingness to cut rates further, if necessary, remains crystal clear.
MacDonald is a senior economist for MMS International Edited by Will Andrews
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