As almost everyone expected, the Federal Reserve held its target interest rate constant in its Federal Open Market Committee statement a earlier this hour. William Polley had mapped out a set of statements that might change, though, that would indicate a change in position.

There's no real change, tipped off by the second paragraph:

Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.

Compare to the June 28 statement,

Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters.

I read that as saying "we know about this sub-prime mortgage issue, but we don't see it causing any concerns elsewhere in the economy."

Jim Cramer's head will explode in five ... , four... , three... , ...

The inflation paragraph is identical between the two statements. Polley thought the recent data had indicated inflation had moderated and should be signaled, but the Fed does not seem to agree with this. The closest thing to a nod towards moderation comes in the fourth paragraph:

Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information.

Again, italics are mine; that phrase replaces the phrase "In these circumstances" in the June 28 statement. That phrase is a real baby step towards moderation of the inflation risk bias. I'd say, in fact, it's nothing more than lip service to Wall Street. Chances are the Fed has paid more attention to the credit boom of the past than the softness of the housing market.

The Dow, predictably, has shed about 175 points in the last forty minutes.

UPDATE: The market bounced back. Mark Thoma has a nice side-by-side of the two statements. He finds some language changes that make him believe "there is more certainty that economic growth has moderated, and there is an increase in the assessment of the downside risks to economic growth." I'm not as sure this is true. The statements look more like qualifiers and CYA-ing than a definite change in tone. Polley says "the Fed acknowledged the fact that there is a bit of a liquidity squeeze. This is significant. I don't recall anything quite this forthcoming in past statement." The Real Time Economics survey has a few people calling it a move towards neutral and others saying it isn't. I'm firmly in the latter with Steven Wood, "The Fed threw the markets a bone, commenting on recent financial market volatility and tighter credit conditions. However, they gave no hint that they would act anytime soon."

Labels: economics