FOMC Minutes Signal Fed Done Easing

Submitted by Ronald Tennant with Metrocities Mortgage:

MBA (5/22/2008 ) Velz, Orawin
Yesterday’s release of minutes from the April 29-30 Federal Open Market Committee meeting showed that inflation was a concern for FOMC members despite a downbeat outlook on economic growth. The minutes provided some insights into the members’ thinking on the post-meeting statement.
In the statement following the April meeting, the FOMC removed the sentence that said “downside risks to growth remain” from the March statement. According to the minutes released yesterday, members noted that the language emphasizing the downside risk to growth was no longer appropriate because they felt that the risks to weaker growth were more closely balanced to the risks to inflation.

While the FOMC reduced the federal funds target by 25 basis points to 2 percent, the minutes showed that most participants viewed it as a “close call.” Participants were bearish about economic outlook but noted that conditions in financial markets showed some improvement prior to the meeting. The Fed’s forecast, prepared for the April meeting, showed a decline in economic growth in the first half of 2008, followed by a modest rebound in the second half of the year.

While members were concerned about growth outlook, they were also concerned about inflation outlook, given rising oil and commodity prices. Members noted that measures of inflation expectations had risen in recent months, and they viewed the risk of increased inflation expectations as “a key upside risk to the inflation outlook."

The minutes were released as the front-month crude oil contract surpassed $133 a barrel for the first time. Overall, the minutes confirmed the view that the Fed will likely hold interest rates steady for an extended period. Several members noted that future rate cuts are unlikely even if the economy contracts.

Stocks declined while Treasury yields rose slightly. The yield on the 10-year Treasury note was up three basis points and stayed around 3.81 percent by mid-Wednesday afternoon. Fed funds futures showed a 90 percent chance that the Fed will keep the target rate at 2 percent at the June 24-25 FOMC meeting.