Highlights
The minutes of the FOMC meeting held on June 27-28 2007 indicate the FOMC deliberations on monetary policy were largely in line with Chairman Bernanke's comments before Congress. The FOMC sees the economy as having strengthened from the flat first quarter and the FOMC acknowledged that core inflation had eased while headline inflation had surged. Importantly, the FOMC sees the recent improvement in core inflation as primarily due to "transitory" factors and is not yet convinced that underlying core inflation has come down.

The Fed sees reasonably healthy economic growth continuing despite on-going weakness in housing with strength coming from business investment, exports, and the consumer sector.

The FOMC remained concerned about strong headline inflation and whether the improvement in core inflation was lasting.

"Headline consumer price inflation stepped up in recent months, driven by large increases in the index for energy. However, readings on core inflation had declined. Core PCE prices rose 0.1 percent in April and were estimated to have posted a similar, modest increase in May. The recent readings had been held down, in part, by declines in volatile categories such as apparel and tobacco products that were likely to prove transitory; the rent components had also decelerated."

"Although inflation pressures seemed likely to moderate over time, the high level of resource utilization had the potential to sustain those pressures. The Committee's predominant policy concern remained the risk that inflation would fail to moderate as expected."

Nonetheless, the Fed nudged down its forecast for core inflation but with caveats.

"Although some of the recent slowing in readings on core PCE inflation was likely due to transitory factors, the staff took some signal from the data and trimmed its forecast for core PCE inflation slightly in coming quarters. Over the next several quarters, total PCE inflation was projected to moderate to a pace close to core PCE inflation."

The FOMC is both concerned and puzzled over labor market conditions - why with the low unemployment rate and low productivity that wages have not been stronger.

"Most participants judged labor market conditions to remain rather tight, particularly for the most skilled workers. The continued tautness of labor markets was something of a puzzle in light of below-trend economic growth over recent quarters, and this development seemed to be connected with slower productivity growth lately. . . These observations suggested that the recent decline in productivity growth might prove smaller than now estimated and largely transitory. . . Some participants further noted that the level of the unemployment rate consistent with stable inflation could be lower than previously thought--a possibility that would help to explain the absence of outsized wage pressures in the current environment."

A key current fear of the Fed is that current headline inflation could feed into inflation expectations.

" While total inflation was expected to slow toward the pace of core inflation over time, a number of participants noted that recent elevated readings posed some risk of a deterioration in inflation expectations."

The bottom line is that the FOM sees the improvement in core inflation as likely temporary and that the economy is still on the strong side and despite various puzzles, remains concerned about the tight labor market. Inflation remains concern number one.

"Members agreed that while measures of core inflation had improved lately, the statement should indicate that a sustained moderation of inflation remained in question and that high levels of resource utilization had the potential to fuel inflation pressures. Against this backdrop, members judged that the risk that inflation would fail to moderate as expected remained their predominant concern."

The next FOMC meeting is scheduled for August 7, 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