the fed outcome well worth reading twice over

well worth digesting.

the fed has made it clear there is no certainty it will not hike again. this will help to keep it's credibility intact after the elections nov 7th when i feel it will raise again in either nov or dec. berney 'has been told to help bush'. time will tell.


THE FED
FOMC stands pat, sees slower growth, inflation risks

By Greg Robb, MarketWatch
Last Update: 2:39 PM ET Sep 20, 2006


WASHINGTON (MarketWatch) -- The Federal Reserve held overnight interest rates steady at 5.25% on Wednesday, but left the door open for further increases if inflation does not behave.
The Federal Open Market Committee tinkered with its statement wording. The committee said it expects a slower economy to reduce inflationary pressures. Read the statement.
"The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market," the statement said.
"Inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand," it said. "Some inflation risks remain."
Richmond Fed President Jeffrey Lacker dissented again, voting to raise rates by a quarter percentage point. Lacker has said inflation remains too high.
The statement "retains the FOMC's flexibility to hike in coming months if growth should reaccelerate and inflation data turn more adverse," said Andrew Tilton, economist at Goldman Sachs.
"It was a bit hawkish," said Mike Englund, chief economist for Action Economics. "They retained a bias to tighten and there was a dissent."
Compared with the August announcement, the revised statement put more emphasis on housing as a factor restraining growth, and acknowledged the good news on energy prices since the last meeting.
This was the second straight meeting with no change in monetary policy. It follows rate hikes at an unprecedented 17 consecutive policy-setting meetings.
The decision to stand pat was no surprise. Ahead of time, economists were in agreement that the Federal Open Market Committee would continue its policy "pause" to allow more time to assess the likely direction of the economy.
The financial market, as implied by the fed funds futures market, is betting that interest rates have already hit their peak for this economic cycle, but many economists remain skeptical that the Fed is done.
With energy prices falling, the consumer sector is looking better, said Dan Seito, an economist for Sumitomo. "The need for rate hikes still exists. This is not the end."
A soft landing with moderate growth and inflation is still the most likely scenario, said Bernard Baumohl of the Economic Outlook Group. "But the odds are edging higher that we could actually see faster growth."
Monetary policy
The Fed targets overnight lending rates to loosely control inflation via their impact on economic activity. Higher rates cool the economy, reducing inflationary pressures over time as demand slows. Lower rates can boost demand.
Banks typically peg their prime lending rates to the federal funds rate. Credit card rates and rates for adjustable rate mortgages are sometimes also tied directly to the fed's target. Other rates in the economy are set by market forces.
Difficult balance
The Fed is facing a complicated economic environment, with growth slowing and inflation risks high.
Some economists said the forecasting environment is the toughest in many years.
On one hand, some economists believe that the slowdown in the housing sector will dampen consumer spending. Another risk to growth is the restructuring of U.S. auto companies.
But others see the consumer as resilient, and believe that growth will rebound by the end of the year, especially with energy prices moving lower.
On the inflation front, many economists believe the Fed remains dissatisfied.
Core consumer inflation remains well above the Fed's "comfort zone" and labor costs have spiked in the first half of the year.
But energy prices have moderated in recent weeks, removing some pressure on prices. But core inflation is still too high for comfort and is expected to move higher still.
This confluence of slower growth and higher inflation makes it likely that the Fed will neither hike rates nor ease for several months, according to Brian Sack, senior economist at Macroeconomic Advisers LLC in Washington.
"Economic weakness will certainly prevent the Fed from tightening. At the same time, inflation is still high, they still see inflation risks. It is unlikely they will reverse course and begin easing either," Sack said.
Next meeting "decisive"
David Rosenberg, chief U.S. economist at Merrill Lynch, said the next FOMC meeting on Oct. 24 will be the "really decisive meeting," because if rates remain on hold, then there is a good chance the Fed will not hike again.
"History tells us that after a tightening cycle, if the Fed then goes on hold for at least four months, then the probability that the next move is a rate cut is 100%," Rosenberg said.
The market may have a better sense of the current thinking at the central bank going into the October meeting because Fed Chairman Ben Bernanke will give an update on his views on current economic issues on Oct. 4 in a speech in Washington. Bernanke hasn't spoken about the economy since mid-July,
Greg Robb is a senior reporter for MarketWatch in Washington.