Yesterday's statement from the Federal Open Market Committee contained no real surprises, but that doesn't mean folks had nothing to say.  The number one blog-parlor game seems to be guessing what strange voices are speaking to the folks behind the curtain.  I'm not inclined to comment on the meeting or what it might mean myself -- the people that matter will be back on the stump soon enough -- but a couple points piqued my interest.

At Cynics Delight, I sense a violation of Dave's TATM principle -- TATM as in "Things Ain't That Mysterious."   CD claims:

...the Fed is looking to take some of the froth out of the real estate bubble.  With over 30% of all home purchases now being funded through adjustable rate mortgages, the Fed is looking to take out some of the steam from real estate speculation.

Although there has been plenty of concern expressed by FOMC participants about the trajectory of housing prices -- in recent comments by Don Kohn, for example -- I don't think I have heard any of them specifically indicate that policy decisions would or should be driven by the goal of taking the steam away from the froth.  Let me take you back a few years -- to March 7, 2002 -- and this exchange between Chairman Greenspan and Senator Jim Bunning (R-KY):

SENATOR BUNNING: ... your attempts to pop the NASDAQ bubble greatly contributed to the recession... I don't think it's the place of you or the Federal Reserve to pop these so-called bubbles...

MR. GREENSPAN: ... I don't think we did pop the bubble as you may put it.  We did raise interest rates in 1999, and the reason we did is, real, long-term interest rates were beginning to rise because the economy was beginning to accelerate. Had we not raised the federal funds rate during that particular period, we could have held it in check only by expanding the money supply at an inordinately rapid rate...

I said innumerable times in years past that when I raised the question in 1996 as to whether monetary policy ought to address asset price changes, I subsequently concluded... that that would be inappropriate for the central bank to be overriding the decisions of millions of investors... I do not think one we ought to do that, I do not think that we do do that.   

That sounds pretty clear to me.  Different time, of course, but a similar sort of issue with asset prices.  Absent any indication to the contrary, doesn't it make some sense to accept that the thinking about such things hasn't changed that much in the past few years?

On the issue of those long-term real interest rates, Kash makes this observation over at Angry Bear:       

If one believes in an exogenously 'neutral' real federal funds rate (as Greenspan seems to)... a neutral fed funds rate is probably somewhere in the neighborhood of 3-4%. If inflation remains in the 2-2.5% range this year, it will take the FOMC more than 12 more months until the Fed's "policy accommodation" has been fully removed at the current "measured pace" of quarter-point hikes. We still have a long way to go, in other words.

But I have my doubts about the concept of an exogenously 'neutral' interest rate. The reason is because I wonder if relative interest rates aren't sometimes just as important as absolute levels of interest rates when it comes to influencing business and consumer spending decisions. So while today's interest rates are indeed low in an absolute sense, I worry that raising interest rates will still chill economic growth from its current level, which is only mediocre to begin with.

Although I would never dream of speaking to what the Chairman does or does not believe, there are few of us (as in nobody I know) laboring in the monetary-policy salt mines who think that the "neutral" federal funds rate is exogenously given, over the business cycle or in the long-run.  In fact, an answer to the "conundrum" about long-term interest rates is vitally interesting in part because it bears on where in the oft-quoted 3-5 percent range the long-term neutral nominal funds rate is likely to reside.

As to the "relative" interest rate, I assume that by relative Kash means "relative to the 'neutral' rate." If so, he is clearly correct:  A low interest rate does not necessarily mean a stimulative policy.  Monetary "tightness" or "ease" is fundamentally defined relative to the neutral rate, wherever it is (as I discussed in length a Cleveland Fed Economic Commentary article).  But it is not my impression or belief that policymakers started out with a numerical definition of neutral a year ago, and have marched forward impervious to the possibility that it may different than what we had figured in June 2004.

Bob at Truck and Barter is worried about a foray into too-tight monetary land too, but calls upon the ghost of indicators past:

To say that equity markets were disappointed with the Fed today is an understatement. You can include me the camp that was looking for some sort of softer approach towards interest rates. I had been saying since nearly the beginning of the year that I don't think the Fed would push the Fed Funds rate much above 3.5%. This had been based on the rather anemic money supply growth rates...

M1 right now is hardly growing while M3 is increasing at a pace just below 5%. These numbers are remarkably similar to those of a decade ago. The market is weary of an inverted yield curve. As you shouldn't try and out think markets, this is justified. With few developed countries growing right now, it seems irrational to kill off the one that is.

In general, U.S. monetary policy has been remarkably free of any reference to money for a long time.  It appeared last in the Chairman's February 2000 monetary policy report to Congress:

Given continued uncertainty about movements in the velocities of M2 and M3 (the ratios of nominal GDP to the aggregates), the Committee still has little confidence that money growth within any particular range selected for the year would be associated with the economic performance it expected or desired. Nonetheless, the Committee believes that money growth has some value as an economic indicator, and it will continue to monitor the monetary aggregates among a wide variety of economic and financial data to inform its policy deliberations.

The aggregates have, if anything, been downgraded since -- there is no longer any mention of them at all in the semi-annual report to Congress, for example.  But clearly there are some of you out there who still have the faith.  So my question is, what should money growth be?

One further point.  In another post, Kash laments:

What would be the harm if the statement read something like this:

"We fully expect to continue our current policy of raising interest rates by 0.25% per meeting for at least the next two or three meetings. And if economic growth continues at current levels, we’ll continue this policy at least through the end of the year. Note, however, that this could change if there are dramatic changes in economic conditions. Obviously."

The Fed has gradually moved toward greater and greater transparency. Wouldn’t plain English be another good step in that direction?

My gut reaction: Kash seems to have figured it out pretty well.  What's the problem?

Also commenting out there: The Prudent Investor breaks down who wins and loses.  Barry Ritholz provides his usual convenient parsing of changes in the FOMC press release.  Mark Thoma invokes the TATM principle too.

UPDATE: General Glut takes up the UK-as-leading-indicator theme I noted yesterday, and predicts "the Fed takes a breather at 3.50%."

UPDATE II: The Capital Spectator ponders the market reaction.  Brad DeLong addresses the issue of whether the FOMC 's behavior contributes to excessive risk taking.