Besides holding short-term interest rates steady at 1%, the FOMC reiterated that the upside and downside risks to sustainable growth for the next few quarters are roughly equal and that its predominant concern remains the risk of inflation becoming undesirably low. It also once again pledged to keep monetary policy easy "for a considerable period." Says Wachovia bank senior economist Mark Vitner: "That's their story, and they're sticking to it."
CAPACITY OVERHANG. However, if the recovery develops as Greenspan & Co. hope in the coming weeks, the FOMC will be hard-pressed not to make more substantive changes in its evaluation of the economy when it next meets to discuss interest rates on Dec. 9. By that time, Fed policymakers will have had the chance to peruse two more monthly jobs reports, allowing them to decide whether the employment market's upturn is more than a temporary blip. If it is, expect the Fed to acknowledge that by saying the recovery is looking increasingly sustainable.
It may take a while longer, though, for the FOMC to back off its view that the risk of falling inflation remains a concern. Why? Even after the recent growth spurt, a lot of excess capacity is still left in the economy, especially in manufacturing. Until that slack is taken up by faster growth in demand, companies will be under pressure to cut prices to boost sales.
So even if the economy grows at a 4% clip over the next year, some Fed officials fret that it would be 2005 until overcapacity is eliminated and the disinflationary bias is blunted. That's why some Fed policymakers, apparently including Greenspan, think chances are good that inflation could fall further in 2004 from already rock-bottom levels.
EXIT STRATEGY? And what about the most controversial part of the FOMC statement -- its promise to keep policy accommodative for a considerable period of time? Will that be changed -- or even dropped -- in December? That's a tough call.
Some policymakers are clearly uncomfortable with the pledge and have begun looking for an exit strategy to free the Fed's hands. But they also recognize that by doing so, they run the risk of triggering an adverse reaction in the financial markets, sending long-term interest rates up and the stock market down. In the end, caution may win out, and the Fed may opt not to tinker with that part of the statement in December. Miller covers the Federal Reserve from BusinessWeek's Washington bureau