No Change in Rates, Substantial Inflation Risk

Fed leaves rates unchanged, and is more concerned with inflation than slowing growth.

Full statement:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Economic activity expanded in the second quarter, partly
reflecting growth in consumer spending and exports. However, labor
markets have softened further and financial markets remain under
considerable stress. Tight credit conditions, the ongoing housing
contraction, and elevated energy prices are likely to weigh on economic
growth over the next few quarters. Over time, the substantial easing of
monetary policy, combined with ongoing measures to foster market
liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the
prices of energy and some other commodities, and some indicators of
inflation expectations have been elevated. The Committee expects
inflation to moderate later this year and next year, but the inflation
outlook remains highly uncertain.

Although downside risks to growth remain, the upside risks to
inflation are also of significant concern to the Committee. The
Committee will continue to monitor economic and financial developments
and will act as needed to promote sustainable economic growth and price
stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke,
Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Donald
L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto;
Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against
was Richard W. Fisher, who preferred an increase in the target for the
federal funds rate at this meeting

A few details:

The statement changed the bias notably form last month, when the Fed said risks were balanced. THe August statement stated "Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee." Thats much more hawkish than the most recent FOMC statement.

Dallas Fed Richard Fisher dissented for fifth time in a row; He wanted to hike rates higher. Hi was the only dissent.

The WSJ reported that this suggests "officials are mostly united in taking a cautious
approach to policy."

Source:
FOMC statement
Release Date: August 5, 2008
http://www.federalreserve.gov/newsevents/press/monetary/20080805a.htm

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What's been said:

Discussions found on the web:
  1. KnotRP commented on Aug 5

    Savings will be diluted until morale improves.

  2. Penguin commented on Aug 5

    I think it is highly probable that Q1 and Q2 economic numbers will be revised down the road, which will make the current Fed’s comments obsolete and useless. Needless to say, the cartel (Feds) fully understands that data is bogus. Scary stuff… Cheers!

  3. Dale commented on Aug 5

    Once again blah, blah, blah. If they really were concerned about inflation (which they are not) then they’d raise rates.

    All they can do is keep rates flat and hope it’s enough to keep the banks afloat.

    Given the recent action in Oil and PMs the next rate move is probably a cut to ward off deflation…

  4. Rob Dawg commented on Aug 5

    Where was the damn caution when lowering rates? Self serving pap.

  5. Mark E Hoffer commented on Aug 5

    Savings will be diluted until morale improves.

    Posted by: KnotRP | Aug 5, 2008 2:37:22 PM

    perfect 1st post

  6. AGG commented on Aug 5

    Their “concern” is touching. It’s a coincidence that the CPI numbers for July, August and September are the key numbers government pensions, Social Security, government wages, TIPS, and many state and private pensions and wages; not to mention the effect on the bogus GDP numbers of high inflation (Hey, we’ve been in a recession since 2001!). Yes, dear children, by October 17 or 18 when they announce that inflation miraculously descended to next to nothing in July, August and September because of the lowering of energy prices (Yes we know they don’t mention energy when it goes up).
    Yes their concern is touching alright; YOUR WALLET!

  7. Matt Rafat commented on Aug 5

    Are we still waiting for capitulation? We will have a sideways market for a while until the housing mess is sorted out. I really don’t see major capitulation happening. The government is working too hard to avoid a capitulation scenario, with bailouts and easy money.

  8. mark commented on Aug 5

    the market flies, and the bears fleeing your blog… I am buying more SDS. looking forward to some volatility.

  9. Peter Boockvar commented on Aug 5

    The 2 things that likely raised the inflation rhetoric in today’s FOMC meeting was #1 a shout out to those Fed members, particularly Fisher, who are most worried about inflation (notwithstanding the recent commodity pullback) and #2, an acknowledgement that even if headline CPI pulls back to the 4% level y/o/y from 5.2% in June, negative real interest rates of 2% is significant and it’s more negative than when the fed funds were at 1% in ’03-’04.

  10. Mike in NOLa commented on Aug 5

    Bernanke is a student of the Great Depression. He is likely really more concerned about deflation than inflation, as shown by his actions so far. But there’s no reason for him to talk about it in the announcements, as it will just drop the dollar as traders anticipate interest rate cuts, which I think will come later in the year when things get REALLY bad.

  11. JustinTheSkeptic commented on Aug 5

    Mike from NOLa,

    How’s the red beans a rice these days? I agree with you about deflation coming on line in a big way. Here is my narrow view: U.S. consumer gone fishing. Cap-ex spending from abroad will diminish as dollar strengthens and Over-seas demand for durable goods diminish because there need for our machines that produce other machines and consumer goods and machines that load trucks and railroad cars (cat, de, etc.) decline. Plus Dollar Strength means export weakness and lower oil means more U.S. savings.

  12. JustinTheSkeptic commented on Aug 5

    I forgot to mention that all those things combine to produce a Keynesian Nightmare.

  13. Andy commented on Aug 5

    Dallas Fed Richard Fisher is from Texas which is an oil economy seperate from the rest of the US. Maybe he should see how the rest of America is suffering under high oil.

  14. AGG commented on Aug 5

    P. Broockvar,
    I understand but who is getting these negative (give away) real interst rates? You? Me? No, this is a setup to raise the rates in November after they announce that inflation was “controlled”. The real reason for all this is that the bond buyers are screaming for higher rates. If they don’t get them soon, they buy elsewhere so the fed has to fake an inflation slow down. I don’t think the fake will work because 1) unemployment is skyrocketing and that can’t be hidden and 2} the bond buyers want a real premium on thei dollar bonds (10 or 11%) which the fed can’t afford to give.
    As far as the general public is concerned, we benefit during the rest of 2008 in lower energy and housing prices.

  15. larster commented on Aug 5

    What upside risk to inflation? Went to the store today and sweetcorn was 99 cents an ear. Newsflash to the FOMC, 99 cents an ear is inflation. Risk my ass.

    WSJ on front of third section has good article on MER and the dim prospects of them ever achieving past profits per share in the near future (like our lifetime). It’s an excellent runthrough of the challenges facing all financials going forward.

  16. AGG commented on Aug 5

    P. Boockvar,
    Sorry for mispelling your name.

  17. rj commented on Aug 5

    “Savings will be diluted until morale improves.”

    I have a T-shirt that on the back says “The Beatings will Continue until Morale Improves”

  18. Mike in NOLa commented on Aug 5

    Red beans are still good, although I spend every other week in Houston. Food is the main thing I miss about NOLA. My current favorite red beans is at Mandina’s on Mondays. Their price is higher than many, but you get enough to feed two. I usually put half the meal in a takehome box before I start so that I don’t overeat too much.

    I generally agree with you on the outlook. Although, in the longer term, can’t see how the dollar can stay up with the huge deficit.

    I have been loading up on QID’s. Bought some more today, although a little above the lowest price when my limit order triggered. If you look through Bloomberg, a number of stories on the European slowdown, Brazil’s market is crashing and China has crashed. They ain’t gonna want to buy iPhones.

  19. sanderson commented on Aug 5

    ‘promote…price stability’- great job so far.

    Another great recap of delayed reactions. Come on- this is THE FED in a growing economic crisis and we’re getting ‘monitoring’ and ‘cautious approach to policy’?

    In the words of a long dead old lady, “WHERE’S THE BEEF????”.

  20. Pete commented on Aug 5

    One again I can’t believe this is really happening (again ) .

    “the market flies, and the bears fleeing your blog… I am buying more SDS. looking forward to some volatility.”

  21. Pete commented on Aug 5

    One again I can’t believe this is really happening (again ) .

    “the market flies, and the bears fleeing your blog… I am buying more SDS. looking forward to some volatility.”

  22. Pete commented on Aug 5

    One again I can’t believe this is really happening (again ) .

    “the market flies, and the bears fleeing your blog… I am buying more SDS. looking forward to some volatility.”

  23. AGG commented on Aug 5

    Suppose you are a broker in a large firm. “Someone” offers to loan you money at 2.25% on the condition that you buy high profile financial and/or dow 30 stocks whenever selling pressure appears. There is NO LIMIT to how much you can borrow and if you can’t pay back, the government will make sure the taxpayers cover your losses. Your fees are (of course) garranteed. What would you do?
    Oh, by the way, this deal is good until elections in November. After that, sell.

  24. techy commented on Aug 5

    AGG..

    and how will they cover the money tracks??

    the FED can only give a loan…but it will have to accounted for something, right?

    and why would some one take that money and buy junk, destroying their own balance sheet??

  25. leftback commented on Aug 5

    Nasty, nasty Bear Market rally… but I think this is close to done:

    Carry trade is close to overhead resistance (USD-JPY 108.50).

    No rate hikes = no further $ strengthening.

    No more upside catalysts – shorts have all been squeezed.

    SRS and SKF looking cheap here. AIG reports tomorrow, those clowns are always good for a massive write-off…..

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