The March FOMC Meeting

March 29, 2006 – The FOMC voted on Tuesday to raise its target Fed funds rate by 25 basis points to 4.75% (Chart 1). The FOMC has raised its Fed funds target by 25 basis points at each of its last fifteen regularly-scheduled policy meetings.

Chart 1. The target Fed funds rate. Nominal and real. January 1987 through March 2006.

According to the FOMC statement, “The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.” (That’s the same as the last FOMC statement in January.) Thus, we can’t rule out another tightening action at the next FOMC meeting in May.

However, we can’t count on a May tightening, either. That will depend on the economic data. As the FOMC reminded us in its January minutes, the outlook for U.S. monetary policy is more uncertain now, because FOMC members no longer share a strong common vision of their best future course. Thus, “…all members agreed that the future path for the funds rate would depend increasingly on economic developments and could no longer be prejudged with the previous degree of confidence.”

In its comments about current economic conditions, the FOMC noted that Q1 economic growth “rebounded strongly” after a temporary lull in Q4. Looking ahead, FOMC members expect growth to return to a “more sustainable pace”.

Although the inflation indicators have remained reasonably well behaved in the data to date, the FOMC continues to worry about the potentially volatile combination of unsustainably strong demand growth and the upward pressure on production costs caused by “elevated” prices for energy and other commodities.

Thus, in addition to their heightened inflation watch, FOMC members will be searching the real economic indicators for reassurance that the economy is in the process of slowing to a “more sustainable pace”. If they don’t find that reassurance, then there is a good chance they will tighten again in May.

Suzanne Rizzo