Steve Blitz Morning Notes

The FOMC statement today reflects a committee that believes the credit crunch is past, the economy is close to stabilizing, and believes the economy's slack buys it some time on inflation as it starts focusing on the unwind.

In the April statement, the Fed wrote:

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract

This month --

Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing.

A tepid upbeat statement, upbeat nevertheless and here is a key component that colors the verbiage later in the statement:

Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales.

In April --

Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing.

The Fed didn't drop the difficulties in obtaining credit as an oversight. While consumers remain under the same pressures, businesses are doing the normal recessionary rebalancing but can now do it without being frozen out of credit. Big progress. Progress enough, in fact, for the Fed to drop this into the statement:

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time

In other words, we see the inflation risk on the horizon but the economy has some time. Time is necessary because the unwind of the balance sheet will not take a week or two -- and unwinding the short-term paper facilities comes first.

In April the statement had this line that is not in the current June statement --

The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs.

The April statement ended with this line --

The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments.

The June statement ends this way --

The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

The shift in language may seem small but the implication is big -- the Fed is telling us that if conditions warrant it they are ready to start pulling back.