Yesterday, the Federal Reserve’s statement added another contrary indicator suggesting the end of the expansionary cycle; their avoidance of economic weakness. Going back 10 years, in June of 2007, US Treasury yields had begun to drop precipitously after 100 bonds were downgraded by S&P; the latest sign of the burgeoning sub-prime crisis. In the midst of this, the Fed’s 6/28/2007 statement characterized the economy this way,

“Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters. Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures. 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.”

No sense of any trouble, just worries about inflation. And yesterday, the Fed’s statement read (in-part),

“Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has continued to expand.”

No acknowledgement of the weakness we have seen in a whole bevy of indicators missing their expectations (Citi Surprise Index). A lot of us could see the storm coming in 2007 just as we do today. Don’t mistake the Fed’s statement for an all-clear on the economy. It is likely just the opposite. Echoing this sentiment are three articles in the newspapers today with a similar topic:

  1. Wall Street Journal Fed Moves One Way, Inflation Another
  2. Financial Times The Fed can only ignore the lack of inflation for so long
  3. Financial Times Investors wary of Fed’s newfound assertiveness