Contraction Slowing, Inflation Not Immediate

The Fed's statement from this month's meeting is presented below, along with its previous statement from the April meeting and my interpretation and commentary interspersed.

'Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales.

'Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.'

'Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment and staffing.

'Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.'

A bit more upbeat in tone, since they omitted the part about continuing to contract and just left the part about the pace of contraction slowing. An English major might object that even if slowing, if it has not stopped -- it is continuing -- but nobody has ever judged an FOMC statement on its literary merit.

The rest of the paragraphs are pretty much the same. The economy is no longer falling off of a cliff, but that does not mean that it is recovering yet. Inventory restocking may help a bit in the short term, but that is not a good driver of long-term economic growth.

While the economic Armageddon scenario is now off the table, a Japanese-style 'lost decade' is becoming more and more likely.