FOMC Comments Likely Put Rate Hikes Beyond Election

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2%.  What is more important than the decision is that this puts the chances of a rate hike in October into a late 2008 or even early 2009 time frame before rates rise.

The key takeaways were that the FOMC said economic activity expanded inthe second quarter, partly reflecting growth in consumer spending andexports while labor markets have softened further and financial marketsremain under considerable stress.

Also noted were tight credit conditions, the ongoing housingcontraction, and the rise in energy prices are likely to weigh oneconomic growth over the next few quarters.

"Over time, the substantial easing of monetary policy, combined withongoing measures to foster market liquidity, should help to promotemoderate economic growth." (the key is ‘moderate’ used there)

Inflation has been high, spurred by earlier increases in the prices ofenergy and some other commodities, and some indicators of inflationexpectations have been elevated. The Committee expects inflation tomoderate later this year and next year, but the inflation outlookremains highly uncertain.

Although downside risks to growth remain, the upside risks to inflationare also of significant concern to the Committee. The Committee willcontinue to monitor economic and financial developments and will act asneeded to promote substantial 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; DonaldL. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto;Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting againstwas Richard W. Fisher, who preferred to increase the fed funds target.

Stocks have held their gains and added some additional as a result of this likely pushing out the rate hike cycle until after the election.  With there still only being one vote to hike, that also takes out higher chances of a hike coming in the immediate future.

Jon C. Ogg
August 5, 2008