by Mish

It would have been fun to be in that FOMC room today with a recorder so we could hear the sound effects but instead we have to “hear between the lines”.

RogerRafter on The Market Traders took a look at wording changes in the last two FOMC statements.

Here is the statement from the January 31, 2007 FOMC Meeting.
Here is the statement from the March 21, 2007 FOMC Meeting.

Old wording: “Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters.”

New wording: “Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.

Old wording: “Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures.”

New wording: “Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.”

Old wording: “The Committee judges that some inflation risks remain. The extent andtiming 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.”

New wording: “In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”

Thanks Rodger.
The new statements show that Fed is supposedly more concerned about inflation and supposedly more concerned about high capacity utilization than in January. Previously they stated “some inflation risks remain“, but their “predominant policy concern” now is that “inflation will fail to moderate“.

With those concerns the Fed ought to be tightening, at least in theory. Instead the Fed completely dropped the phrase “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“.


Dropping that phrase shows the Fed is far more concerned over a recession and an implosion in housing than any inflation they are harping about. A more honest wording would have been something like this.

FOMC Announcement Translation

We are unanimously scared half to death by the implosion in housing, defaults and foreclosures. Our biggest fear is a recession. A jobs slowdown would worsen that situation dramatically.

We are also somewhat concerned by rising food prices but those prices are soaring primarily because of Bush administration policy handouts to farmers and the ethanol industry. Economic policy can not really cure problems caused by poor administrative decisions. It would be a mistake to try.

Because of blatantly bad policy decisions by us, notably Greenspan’s praise of subprime lenders, promotion of ARMs at the exact worst time for the consumer, support of toxic loans, and most importantly our previous decision to slash interest rates to 1%, we created the current property bubble. We now admit we did that on purpose. We just never expected the bubble to get this out of hand. We created the housing bubble on purpose to bail out banks that were at risk due to poor loans made to the dotcom industry. Now to bail out the housing industry we feel compelled move to a more neutral stance.

With consumer debt levels where they are, we are going to do everything in our power to keep asset prices high. If we could, we would even reinflate the housing bubble. But that gig is up unfortunately and with it any real hope for jobs expansion.

Now is not the time for a recession. We are in this fix because there is never a time for a recession. We hope to forestall recessions forever because if we can’t all hell will break loose on the downside.

That Mish readers is what the Fed really said today. Nonetheless the market seemed to love it. But what’s not to love? The simple written translation of the above text is “Party On Dudes”.

In the UK they are now admitting to the “Party On Dudes” philosophy as noted by the The Independent headline Ex-Governor George says Bank deliberately fuelled consumer boom.

The Bank of England deliberately stoked the consumer boom that has led to record house prices and personal debt in order to avert a recession, the former Bank Governor Eddie George admitted yesterday.
Lord George said he and his colleagues on the Monetary Policy Committee “did not have much of a choice” as they battled to prevent the UK being dragged into a worldwide economic slump by slashing interest rates. And he said his legacy to the current MPC was to “sort out” the problems he had caused.
Lord George, who headed the Bank for a decade from 1993, revealed to MPs on the Treasury Select Committee that he knew the approach was not sustainable. “In the environment of global economic weakness at the beginning of this decade… external demand was declining and related to that, business investment was declining,” he said. “We only had two alternative ways of sustaining demand and keeping the economy moving forward – one was public spending and the other was consumption.
“We knew that we were having to stimulate consumer spending. We knew we had pushed it up to levels which couldn’t possibly be sustained into the medium and long term. But for the time being, if we had not done that, the UK economy would have gone into recession just as the United States did.”

Heaven forbid! “A recession?” The lengths that central banks are going to avoid a recession are staggering. And each attempt to prevent said recession adds more and more and more to consumer debt. The hangover from this long running party is going to be the worst since the great depression. But who cares now? For now, the only discernible message from the Fed was “Party On Dudes”. No one could hear the panic in their voices when they said it.

Mike Shedlock / Mish/

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