There was no significant new information in the minutes of the March FOMC meeting which the Fed has not already communicated through the March policy statement and the Chairman??™s recent testimony. Nevertheless, it is instructive to note the nuances of the inflation-growth policy debate.

With regard to inflation, the there is strong conviction among the members of the FOMC about the considerable risk that core inflation may not moderate in the desired direction. This concern was explicit in the minutes, which noted that ???most participants continued to expect that core inflation would slow gradually, but the recent readings on inflation and productivity growth, along with higher energy prices, had increased the odds that inflation would fail to moderate as expected; that risk remained the Committee??™s predominant concern.??? Furthermore, the minutes indicated that ???participants agreed that risks around the expected and desired path of a gradual decline in core inflation remained mainly to the upside; some noted that upside risks to inflation appeared to have increased slightly in recent months.???

The concern about weakening economic conditions was indicative in their observation that ???the relatively slow pace of investment in recent months might be signaling that business executives had become less certain about the outlook, and perhaps that they expected quite modest gains in sales. Participants agreed that the possibility of persistently sluggish investment spending was an important downside risk to the outlook for economic growth.??? The Fed is watching capital spending in addition to the spillover effects from the housing market slowdown. Capital spending turned negative in the second and fourth quarters of 2006.

The FOMC??™s battle with balancing the goals of maintaining contained inflation and promoting growth are explicit in the following excerpts from the minutes: (1) ???Recent developments were seen as supporting the Committee??™s view that maintaining the current target was likely to foster moderate economic growth and to further the gradual reduction of core inflation from its elevated level. Nonetheless, the combination of generally weaker-than-expected economic indicators and uncomfortably high readings on inflation suggested increased downside risks to economic growth and greater uncertainty that the expected gradual decline in core inflation would materialize.??? (2) ???The Committee agreed that further policy firming might prove necessary to foster lower inflation, but in light of the increased uncertainty about the outlook for both growth and inflation, the Committee also agreed that the statement should no longer cite only the possibility of further firming.??? Additional economic data supportive of a lower federal funds rate will be available in the months ahead and prompt a lower federal funds rate.

Canada: Housing Trend Has Started to Chill

Housing starts rose 7.6% in March to an annual rate of 210,900 units, following a sharp 21.3% decline in February. On a year-over-year basis, first-quarter starts were down 10.5%. Today??™s figures corroborate last week??™s building permit data which showed a 17.3% decline in February. The number of permits issued in February (195,300) was the lowest recorded rate since December 2001, and suggests that the market has yet to stabilize.

The latest data are consistent with the consensus view that the Canadian housing market will cool in 2007 as past rate hikes and higher prices begin to affect demand. The booming housing market has been a key driver of economic growth in recent years and has acted as a major contributor to inflation (housing-related costs account for more than a quarter of the CPI basket). Amid a strong employment environment and with still-favorable interest rates, the Canadian housing market is likely to gradually correct itself throughout 2007, escaping the sharper pitfalls of its southern neighbor. Should the slowdown prove sharper than expected, however, we maintain our view that ample room remains for interest rate cuts.