FOMC Minutes Released: Fed Still Concerned About Inflation

Earlier today, the Federal Reserve released the minutes from the December 12 FOMC monetary policy meeting: Despite clear sings that inflation is slowing, Fed officials were still quite concerned about inflation at last month's meeting.

The following are clips from the minutes released today:

"...In their discussion of the economic situation and outlook, meeting participants noted that their assessments of the medium-term prospects for economic growth and inflation were little changed from the previous meeting..."

"...In their discussion of the major sectors of the economy, participants noted that developments in the housing market continued to weigh heavily on economic activity. Housing starts and permits for new construction had dropped sharply in October, and contacts in the building sector reported that construction firms were continuing to cancel options on land purchases. However, there were some indications that home sales might be starting to stabilize, aided by a marked slowing in the rate of increase of house prices and a decline in mortgage rates in recent months. Several participants also noted that a range of non-price incentives and concessions were being offered by construction firms to bolster sales. But even if home purchases had begun to level off, residential investment was likely to fall further in coming quarters as homebuilders sought to reduce their backlogs of unsold homes..."

"...All meeting participants remained concerned about the outlook for inflation. Although readings on core inflation had improved modestly since the spring, nearly all participants viewed core inflation as uncomfortably high and stressed the importance of further moderation. Participants expected core inflation to edge lower over time, in part as the pass-through of higher prices for energy and other commodities ran its course and as the moderate growth in aggregate demand likely led to a modest easing of pressures on resources. Some participants also highlighted the impact that movements in the prices of individual components of the price index, such as owners' equivalent rent and medical costs, could have on near-term readings on core inflation. More generally, participants stressed there was considerable uncertainty as to the probable pace and extent of the moderation in core inflation and that the risks around this desired downward path remained to the upside. Moreover, participants expressed concern that a failure of inflation to moderate as expected could entail significant costs if an upward drift in inflation expectations ensued..."

"... The outlook for economic growth and inflation was thought to have changed relatively little since the previous meeting..."

The Latest Odds

Of course, investors reacted to this week's housing news. As of right now, the folks who trade in Federal Funds Futures have odds at around 16% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will opt to lower the benchmark Federal Funds Target Rate by 25 basis points at the March 21^ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Predictions:

• In all likelihood, the Prime Rate will remain at the current 8.25% after the January 31^ST FOMC monetary policy meeting.
  
• Current odds that the Prime Rate will be cut to 8.00% at the
  March 21^ST, 2007 FOMC monetary policy meeting: 16% (unlikely)
  
• NB: Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are continually changing, so stay tuned to this blog for the latest odds. Odds may experience a significant shift on the release of the following economic report:

• Friday, January 5, 2007: The Labor Department releases the Employment Situation report for December, 2006.

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