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Thursday, June 26, 2003

Learning to Speak Like a Fed

Morgan Stanley's David Greenlaw talks us through the intricacies of 'fedspeak'. I think what he's saying is that the idea of sending a clear signal to the markets still needs working on. Meantime it's a hell of a lot better than Duisenberg and co.

Here is the comparison of the risk assessment portion of the May and June statements:

June 25 Statement

"The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome substantial fall in inflation exceeds that of a pickup in inflation from its already low level. On balance, the Committee believes that the latter concern is likely to predominate for the foreseeable future."

May 6 Statement

"The Committee perceives that over the next few quarters the upside and downside risks to the attainment of sustainable growth are roughly equal. In contrast, over the same period, the probability of an unwelcome substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level. The Committee believes that, taken together, the balance of risks to achieving its goals is weighted toward weakness over the foreseeable future."

As you can see, the wording is virtually identical except that the reference to "weakness" in May is replaced by an indication that deflation risk is likely to "predominate" for the foreseeable future. This might be interpreted as a signal that monetary policy is likely to remain easy for an extended period of time -- but it is couched in Fedspeak and the message seems no more or less clear cut than in May. So, the latest risk assessment is probably best described as tilted toward deflation concerns (though the Fed is still careful to not use that term) -- as opposed to the previous tilt toward weakness.

Clearly, the risk assessment language remains a work in progress. Following the May meeting, some analysts (including ourselves) had expressed dissatisfaction with the "weakness" label. If the economic risks are described as balanced (as in the first sentence of the paragraph), then what does weakness refer to: weakness in inflation? weakness in monetary policy? The wording was certainly confusing. So, the Fed tweaked the format once again. However, in our view, the new wording hardly represents a notable improvement. It would be much clearer -- and allow the Fed to send a more powerful signal -- if they simply added an indication of their policy leaning to the assessment of the dual growth and inflation/deflation risks.
Source: Morgan Stanley Global Economic Forum

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