by Calculated Risk on 9/18/2010 09:44:00 PM

I thought there were three things to look for in the August 10th FOMC statement:

1) How the statement would discuss the economic slowdown.

The FOMC statement was more pessimistic in August than in June.

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

In the period since the August FOMC meeting, the economic data has remained weak, but the data hasn't indicated a further slowdown (at least not yet). So I expect the tone of the first paragraph to be about the same.

2) How the FOMC would express more concern about deflation. The FOMC didn't make a significant change:

Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

Actually inflation expectations have been trending down, and the FOMC might remove the "stable" expectations phrase this week (although this seems to be a key point of contention on the FOMC).

3) And the BIG one for the August meeting was how the FOMC would change their reinvestment strategy. They decided to keep the Federal Reserve's holdings of securities stable by investing the principal payments from maturing MBS in longer-term Treasury securities.

So what will change in the September FOMC statement? Probably very little. The first paragraph will be reworked a little, but the tone will probably remain the same. And the key sentence "exceptionally low levels of the federal funds rate for an extended period" will mostl likely stay the same.

And it seems too soon for further easing based on Fed Chairman Ben Bernanke comments in his speech at Jackson Hole. Bernanke suggested that additional easing would probably require “significant weakening of the outlook” or a meaningful decline in inflation expectations (or further disinflation). The first hasn't happened yet ... although they might express more concern about disinflation this week.