Did the Fed Really Signal a Pause?

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.


The vaunted removal of the phrase “downside risks to growth remain” from the Federal Reserve’s statement of April 30 accompanying its redtion in the benchmark Federal funds rate by 25 basis points is being overplayed by the media and commentators, and quite possibly the bond and stock markets, as a signal a new “pause bias” in the Fed’s thinking about rates.

It is entirely possible that, given the laundry list of concerns that the Fed specifically listed in its statement that it believes will “weigh on” economic growth going forward, they thought o remove the more generic downside risk statement simply because it was superfluous!

Thus mere correction of redundancy has been elevated to a notion  of bias change. It is insterad apparent that the votes just were no there for a specific “pause bias” statement. Indeed, when the Fed wants to make such a bias clear, it knows exactly what to say and how to say it. See for example its Otober 31, 2007, statement referring to the risks of recession and inflation being evenly balanced.

Of course, that just didn’t turn out to be the case — so perhaps six months later the Fed did not wish to declare victory against recession prematurely. As a “forward looking” statement, the April 30 message leaves little risk that the Fed will “miss its forecast” and hardly gives the markets much to go on — as Warren Buffett says, “all the speculation is just speculation”.

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