The Short View By John Authers

The Short View By John Authers
Copyright The Financial Times Limited 2007
Published: March 22 2007 02:00 | Last updated: March 22 2007 02:00


Cub journalists are taught that "burying the lead" is a cardinal sin. The most important news in a story must be in the first sentence, not buried at the bottom. The market response to yesterday's communique from the Federal Reserve's open market committee was that chairman Ben Bernanke had done exactly that. Had he?

On the surface, the statement - more important than the decision to keep the Fed Funds rate at 5.25 per cent, which was expected - is hawkish. Core inflation was "somewhat elevated" (in January, readings had "improved modestly"). Inflation is now the FOMC's "predominant concern" (whereas in January it merely said "some inflation risks remain"). That was balanced by the removal of January's reference to "somewhat firmer economic growth" - but there was nothing to signal an imminent rate cut.

Then came an innocuous final sentence: "Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth." That is anodyne.After all, the Fed's remit isto limit inflation and foster employment. But previously, the Fed had referred to "additional firming" not the neutral "policy adjustments".

The market read this as removing the Fed's officialbias towards tightening, and therefore a signal that a rate cut is coming.

The dollar collapsed to two-year lows against the euro; bond yields shot downwards; and US stock indices rallied by about 2 per cent. Continuing the journalistic analogy: the invisible hand of the market acted like that of a good sub-editor and crossed out everything before the critical final sentence that no longer talked of additional firming. It also added a glaring headline: "Rates are coming down".

Bernanke may have been trying subtly to make room for manoeuvre - in case the debacle in subprime lending requires sharp easing - while maintaining in his inflation rhetoric an implicit bias towards tightening.

He probably did not wanta market response that would effectively ease monetary conditions. But markets arenot so subtle.