Fed takes foot off the market’s neck

Since the last Fed meeting, I and the markets have been concerned that the Fed was going to break the economy’s neck by threatning 50 basis point interest rate increases.  My fear in particluar, was that the Fed was targeting the housing bubble and cared little for the effect on the overall economy.  I believe aggressive interest rate increases would cause the collapse of financial institutions overly levered to the housing market as well as cause the demise of GM, which is basically a financing business now. 

However, after reading the Fed notes, its clear that the Fed is keenly aware that the economy isn’t overheating and that "measured" interest rate increases are still warranted. 

The two key passages in the Fed notes for me are…

"Although the required amount of cumulative tightening may have increased, members noted that an accelerated pace of policy tightening did not appear necessary at this time, as a degree of economic slack apparently remained, productivity growth would probably continue to damp increases in unit labor costs and prices, and inflation would most likely continue to be contained. In these circumstances, Committee members judged that the measured removal of policy accommodation was appropriate for now."

"Members also focused on the issue of whether to reiterate the judgment expressed in the Committee’s recent statements that ". . . policy accommodation can be removed at a pace that is likely to be measured." Some expressed the view that such language could constrain future policy inappropriately; while these concerns were not new, they were now felt to be more pressing, as the odds that the Committee might need to step up the pace of policy firming were thought to have increased. Members noted, however, that the existing "measured pace" language was clearly conditional on the economy evolving in a way that promised a gradual return to high levels of resource utilization and on inflation remaining low, and thus believed that the wording did not rule out either picking up the pace of firming or pausing in the process of removing policy accommodation should circumstances warrant. They also noted that the language had not precluded a notable increase in medium- and longer-term interest rates over the intermeeting period as markets extended the expected gradual increase in policy rates."

I think all the dire charts I have posted could become moot at this point.  The negativity that has built up in the markets over the past month can now be unwound on the upside.