Magazine article Economic Trends

Monetary Policy: What's in a Few Words?

Magazine article Economic Trends

Monetary Policy: What's in a Few Words?

Article excerpt

06.29.07

The Federal Open Market Committee (FOMC) left the target level of the federal funds rate unchanged at 5.25 percent this afternoon. It was the eighth consecutive meeting at which the rate was held steady. The inflation-adjusted fed funds rate rests near 3 percent, or about 400 basis points above its low of June 2004.

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Any changes in the policy rate would have come as a great surprise to market participants, indeed, implied yields and estimated probabilities based on fed funds futures indicate that a rate change is not likely before the end of the year. An adjustment to the post-meeting statement language, on the other hand, was widely anticipated.

Language changes were seen as necessary to account for the evolution of the outlook for both inflation and economic growth since the last meeting. In its rationale for the May meeting decision, where rates were held steady, the FOMC said that economic growth had slowed and core inflation remained "somewhat elevated." Two favorable readings on CPI core inflation and some good news on economic activity altered the FOMC's basis for its rationale. The June statement reads: "Readings on core inflation have improved modestly in recent months. …

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