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May 03, 2005
Tangled Up in Rhetoric
Is the Federal Reserve's attempt to explain its outlook for economic growth and inflation backfiring?
Around 2:15 p.m. ET today, the Fed released a statement to announce it raised interest rates for the eighth time by a quarter percentage point. Most folks were watching to see if the Fed kept its "measured" pace language. It was there. The stock and bond markets waffled around, trying to make sense of the Fed's acknowledgement that economic growth had slowed, and that inflation pressures have picked up. The Fed even went so far to say that spending growth has slowed, partly because of higher energy prices.
But wait -- they forgot a sentence! Before the stock market closed at 4 p.m., the Fed said in a revised statement that this sentence was "dropped inadvertently" from the second paragraph: "Longer-term inflation expectations remain well contained."
What's strange is the third paragraph already included the phrase "with underlying inflation expected to be contained." So adding the sentence back in the second paragraph was redundant, says Michael Wallace, global market strategist for economic research outfit Action Economics. "My theory is they are tangled up in their own rhetoric," Wallace says. "Their attempt to be completely transparent is failing."
Wallace says he's not sure if many people even noticed that the sentence was missing from the first release. Treasury yields were steady, as many experts considered the statement to be on the hawkish side, and then quickly dropped when the Fed announced the snafu, Wallace says. Though the missing sentence may have caused confusion in the bond pits, Wallace doesn't see any lasting affect on the markets.
One thing is certain, though, according to Wallace: "Some streamlining of the statement is in order."
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