Magazine article Economic Trends

Monetary Policy: Holding Steady

Magazine article Economic Trends

Monetary Policy: Holding Steady

Article excerpt

06.05.07

On May 30, the Federal Reserve Open Market Committee (FOMC) released the minutes from its May 9 meeting. The minutes noted that the economy had expanded "at a below-trend pace in recent months." The committee commented on weak demand in the housing market, a slowdown in consumer spending, and "subdued" business fixed investment. However, the staff forecasted a pickup in economic activity "to a rate a little below that of the economy's long-run potential for the remainder of this year" The committee also expects core inflation to "slow gradually" but recognizes there is "considerable uncertainty" regarding that judgment. Inflation remains the predominant concern in the committee's view, and "some noted that a failure of inflation to moderate could entail significant costs particularly if it led to an upward drift in inflation expectations."

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The release of the minutes did not have substantial impact on market participants' views of the future course of monetary policy. Currently, participants place over a 97 percent probability on the committee maintaining the federal funds rate at 5.25 percent at the June meeting. This probability has steadily increased over the past month. Looking further ahead toward the August meeting, participants overwhelmingly expect no change in policy.

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Participants in the market for federal funds futures currently expect some possibility of future rate cuts but not until the later part of the year. …

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