Fed leaves interest rates unchanged

Fed leaves interest rates unchanged
By Krishna Guha in Washington
Copyright The Financial Times Limited 2007
Published: June 28 2007 21:41 | Last updated: June 29 2007 02:22


The Federal Reserve on Thursday left interest rates unchanged as it kept a resolute focus on the risks to future inflation, noting the recent decline in core inflation in the US but playing down its significance in language that offered little relief to the bond markets.

The statement at the end of its June policy meeting, which kept rates at 5.25 per cent, made no reference to the recent turmoil in the bond market or to any risks to growth deriving from it, leaving the impression that the Fed’s view of US economic prospects had not changed greatly since the last meeting, in early May.

The US central bank dropped its description of core inflation as “somewhat elevated” and acknowledged that “readings on core inflation have improved modestly in recent months”.

But it added: “A sustained moderation in inflation pressures has yet to be convincingly demonstrated.” With risks to inflation from a tight jobs market, the Fed said its “predominant policy concern remains the risk that inflation will fail to moderate as expected”.

The statement came after revisions to inflation estimates for the first quarter of the year suggested that the easing in core inflation was not as marked as earlier data suggested.

The Fed’s new language on inflation looks to be a compromise between those on the committee who want to drive inflation down to about 1.5 per cent and those who would be content at or just under 2 per cent.

Some analysts interpreted the Fed’s decision no longer to talk about core inflation as “somewhat elevated” as marking a small step in a more dovish direction. However, this may largely be a tidying-up exercise.

Fed officials worried that, if they continued to offer a running commentary on the level of core inflation, the moment they stopped calling it elevated the market would assume they had reached an agreed de facto inflation target. Moreover, the Fed would like to direct the market’s attention to its forecast of future inflation and the risks to that forecast, rather than the current core rate.

In a note to clients, Goldman Sachs economists said: “Statements on recent and prospective inflation are slightly more hawkish than we expected; however, the FOMC retains its focus on core inflation (as expected) and gives no hint of discomfort with policy on its current setting.”

Bruce Kasman, JPMorgan chief economist, summed up the message: “In short, the Fed is more comfortable with what it is seeing on growth and inflation and is not considering action anytime soon. But it maintains a firm inflation bias and is telling us that this will not change soon, even if June delivers low core inflation.”