Highlights
The minutes of the FOMC meeting held on March 20-21, 2007 indicate the FOMC recognized increased risks to both weaker growth and also to inflation remaining unacceptably high. Importantly, all FOMC members agreed that the predominant risk was too high inflation.

Overall, the Fed sees downward revisions to real growth in the first quarter of 2007 but improvement later in 2007 but still slightly below potential. Its forecast for core inflation was revised up, largely due to a partial rebound in oil price and due to continued tight labor markets and high compensation costs. Nonetheless the Fed sees core inflation slowly coming down during 2007 and into 2008.

"In its forecast prepared for this meeting, the staff marked down the projected increase in real GDP in the first quarter in response to weaker-than-expected incoming data on business equipment spending and federal defense purchases. The recent increase in oil prices and decline in equity prices, along with increased strains in the subprime mortgage sector, were expected to exert some drag on real activity over the remainder of the year. Even so, real GDP growth was expected to pick up to a rate a little below that of the economy's long-run potential for the remainder of 2007, as declines in residential construction activity lessened, and to remain at a similar rate in 2008. The increase in energy prices over the intermeeting period led the staff to revise up its forecast for headline PCE inflation during the first half of this year, but the staff continued to expect that core PCE inflation would edge down over the remainder of this year and next."

"However, additional evidence of sluggish business investment and recent developments in the subprime mortgage market suggested that the downside risks relative to the expectation of moderate growth had increased in the weeks since the January FOMC meeting. At the same time, the prevailing level of inflation remained uncomfortably high, and the latest information cast some doubt on whether core inflation was on the expected downward path. Most participants continued to expect that core inflation would slow gradually, but the recent readings on inflation and productivity growth, along with higher energy prices, had increased the odds that inflation would fail to moderate as expected; that risk remained the Committee's predominant concern."

"Most participants continued to expect a gradual decline in core inflation over the next year or two, fostered by stable inflation expectations, a likely deceleration in shelter costs, and a slight easing of pressures on resources. Nonetheless, all meeting participants expressed concern about the risks to this outlook. The latest readings on core inflation were higher than expected, and it was difficult to discern whether the apparent downward trend in core inflation during the past few quarters was continuing. Also, the recent increases in prices for energy and some non-energy imports likely would boost overall inflation in the near term and might put upward pressure on prices of some core goods and services. Moreover, rates of resource utilization that were near the high end of historical experience suggested a possibility that inflation pressures could build. Participants agreed that risks around the expected and desired path of a gradual decline in core inflation remained mainly to the upside; some noted that upside risks to inflation appeared to have increased slightly in recent months."

"All members agreed the statement should indicate that the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected."

The bottom line is that the Fed sees the process of bringing core inflation down as somewhat protracted and it is likely that interest rates will not be coming down soon. The detail in these minutes clearly indicates many of the reasons why many FOMC members want to adopt formal inflation targeting - to speed up bringing down core inflation.

The next FOMC meeting is scheduled for May 9, 2007.

2007 Release Schedule

Released On: 1/3 2/21 4/11 5/30 7/19 8/28 10/9 11/20 Released For: Dec Jan Mar Apr Jun Jul Sep Oct