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12:14 2007/03/16
FOMC March 20-21st Meeting
??? FOMC??™s predominant concern is the ???risk that inflation will fail to easeas expected???
??? Fed??™s communication isconsistent with the policy staying on hold and suggests that the Fed is a long wayfrom easing
??? We expect the hawkish bias toremain unaltered The tone of Fed??™s communication remains consistent witha tightening bias
In the intermeeting period, economic data has comeon balance on the soft side, especially data on business investment. However,concerns on downside risks to growth have not intensified significantly as consumptiongrowth and job creation remain solid. In January, core inflation came on thehigh side of expectations; yet, this followed three straight months with lowreadings. Thus, after averaging to smooth monthly volatility, core inflationhas eased in recent months, consistent with Fed??™s view of a gradual decrease inunderlying inflation. However, for the Fed the predominant risk is inflationand they remain focused on whether it will decline gradually or remainpersistently above their comfort zone.
After Bernanke??™s Testimony, futuresmarkets assigned a 26% probability of a rate cut by September and discountedwith a 86% probability a 5.0% fed funds rate by year-end. Now, discount a ratecut by September and anticipate a 4.75% fed funds rate by year-end with a 100%probability. The median of analysts expects the Fed will ease policy by 25bp in2007. Meanwhile, Fed??™s communication remains consistent with a tightening bias.
??¦Thus, we anticipate both the monetary policy wording and the balance of risksto remain unalteredFed??™s hawkish bias continues to suggest thattightening is more likely than easing, consistent with their belief that therisk of inflation remaining too high is greater than the risk of economicgrowth being too low. The Fed will continue to be patient until data clearlypoints to either a sharper deceleration or persistently higher core inflation. Althougheconomic growth will be slightly below potential, markets will continue tight ??“witha relatively stable unemployment rate??“, exerting pressures on resources.Moreover, with core inflation above Fed??™s comfort zone for most of 2007 andwith upside risks exceeding downside risks, the FOMC will keep its hawkishbias. Therefore, in the absence of a sharper deceleration in GDP growth, theFed will maintain its extended pause. The monetary policy wording i.e, thehawkish bias, will remain unaltered in next meeting??™s statement.
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