[jyl]

Originally posted by Porsche-O-Phile
Interesting turn!

Here's an example of Wall St reaction/interpretation of Fed action - shows how the game of parsing each word and nuance of the Fed statement is played - futures currently imply 50% probability of a hike at Sept mtg - basically we're back to having the market twitch with each new piece of econ data

the FOMC held policy rates unchanged today, following seventeen consecutive hikes at a 25bp increment. In its accompanying statement, the FOMC maintained the key elements from the previous meeting -- including its assessment that "some inflation risks remain" and that "the extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information." In doing so, the committee maintained its tightening bias and signalled that the policy pause does not reflect a major change in the Fed thinking about the economic outlook. This message of continuity in the policy setting process was reinforced by its repetition of the language from the June statement that growth is "moderating from its quite strong pace earlier this year, reflecting a gradual cooling of the housing market and the
lagged effects of increases in interest rates and energy prices."

In constructing the statement this way, the FOMC is signalling that a pause should not be viewed as an end to the tightening cycle. That said, the FOMC statement provides a strong indication that the committee will be on the sidelines for more than one meeting. The June statement was cautious on the link between growth and inflation stating that "the moderation in the growth of aggregate demand should help to limit inflation pressures over
time" In contrast, today's statement expressed greater conviction on the inflation outlook stating that "inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand." Any serious challenge to this view is not likely to emerge in the
coming weeks and we interpret today's statement as an indication that the bar is quite high to get the Fed to tighten at the September 20th FOMC meeting.

The FOMC is thus expressing a willingness to be patient with above 2% core inflation as it assesses the outlook -- a message consistent with Chairman Bernanke's recent congressional testimony. Assessing how much patience the Fed will display is now the key outlook issue. Most likely, the latest reports on inflation and labor costs have increased the committee's
concerns about medium-term inflation risk -- a point reinforced by the removal of the phrase from that June statement that "productivity gains have held down the rise in unit labor costs." In addition, FRB Richmond President Jeffrey Lacker's dissent at today's meeting likely reflects the existence of a minority view by some reserve bank presidents for further
tightening. What this suggests is that the Fed may not view patience as a virtue for long.

In all, we remain comfortable with our view that the Fed will be on hold at the September and October meetings. However, if we are right that growth firms into year end (with resource utilization rates rising and core inflation tracking above 2%) the FOMC will likely be tightening as we turn into 2007.