NEWS / Foreign Exchange

FOMC March 20-21st Meeting

• The statement had important changes
• FOMC increases flexibility and moves a step closer to neutrality
• Fed??™s hawkish bias changed to implicit from being explicit

Although the wording moved closer to neutral

As widely expected the FOMC kept rates steady at 5.25% for the sixth consecutive meeting. Although the wording of the statement had important changes, we judge that the statement remains consistent with an extended pause. However, the probability of policy easing probably increased, while that of further rate hikes declined sharply.

The paragraph on growth described recent indicators as ???mixed??? rather than ???somewhat firmer???, while the description of the housing sector adjustment changed from ???tentative signs of stabilization??? to ???ongoing???.

We consider that these changes reflect a somewhat gloomier perspective on business investment and the housing sector. Thus, the staff??™s forecasts on GDP growth were probably lowered once again.

With respect to inflation, the statement changed the description on core inflation from ???improved modestly??? to ???somewhat elevated???. Still, the FOMC reiterated that ???inflation pressures seem likely to moderate over time???; although it maintained that ???the high level of resource utilization has the potential to sustain inflationary pressures???.

The policy paragraph dropped the reference to ???additional firming??? but maintained that inflation remains as the main policy concern. Thus, Fed??™s hawkish bias has changed to implicit from being explicit.

??¦ it remained hawkish

The statement signals greater uncertainty on the economic outlook among FOMC members. The wording was carefully redacted to transmit the message that the FOMC is no longer considering further hikes, but at the same time it is not ready to ease monetary policy; thereby gaining flexibility. This reflects that the FOMC is uncertain on whether mixed data anticipates a sharper economic deceleration or if weakness in some indicators proves to be transitory. FOMC??™s main concern continues to be ???the risk that inflation will fail to moderate as expected???. As a result, although the wording remains hawkish, it is closer to neutral. While some fedwatchers may be tempted to consider these changes as the first step to a rate cut, this movement will occur only if economic activity deteriorates and the inflation outlook remains stable. On the contrary, if downside risks to growth decrease, the statement??™s flexibility would be consistent with an extended pause.