The Fed held firm for the fourth consecutive meeting, keeping the federal funds rate at 5.25%. Short-term rates are therefore more likely to hold steady for a while. They gave us the “hi” sign that [rate cuts may be coming next year [Bankrate.com]](http://www.bankrate.com/brm/news/fed/main-dec06.asp).

They do seem to be [raising more warnings about the housing market [WaPo]](http://www.washingtonpost.com/wp-dyn/content/article/2006/12/12/AR2006121201391.html) at each of the 4 meetings where they have kept rates unchanged, inferring that housing is keeping inflation in check.

This makes me wonder…if inflation is really not that much of an immediate threat because they are inferring future rate cuts, then perhaps the Fed is overstating the economic weight of the housing market’s problems to serve as an offset? Housing seems to be their _out_ for not raising rates right now.

During the heady days of the Greenspan reign, the [WSJ journal developed a really cool graphic [ESJ]](http://online.wsj.com/documents/info-fedparse0601.html) that parsed the language of the FOMC after each meeting. Likely because of greater transparency under the Bernanke era, there wasn’t a need because the language is less cryptic.

Here’s the [Federal Open Market Committee’s statement on the federal funds rate [Federal Reserve]](http://www.federalreserve.gov/boarddocs/press/monetary/2006/20061212/)

Note the concept that Bernanke introduced by _warning everyone about inflation to make investors jittery_, which then causes the same effect as having a rate increase, but still gives clues that [a future rate cut is coming [LA Times]](http://www.latimes.com/business/la-fi-fed13dec13,1,1222060.story).

>In the statement explaining its decision, the central bank’s Open Market Committee signaled new concern about risks that the economy could sputter, noting that “recent indicators have been mixed.”

>With such slight changes in language, the Fed reinforced the consensus view that the nation’s monetary policymakers could begin to lower rates next year. Still, the Fed warned, “some inflation risks remain” that might necessitate credit tightening.

[The Fed is walking a fine line here: [TheStreet.com]](http://www.thestreet.com/_tscs/markets/marketfeatures/10327514.html)

>The Federal Open Market Committee completed 2006 by telling investors to follow the data just as they would follow the bouncing ball when singing along to a Christmas carol on television. That’s what the Fed is doing. To wit, the central bank toed a careful line Tuesday by acknowledging slower growth, but maintained a tightening bias.

Definition of a diplomat: _someone who informs you that you are in trouble, but you are happy they told you._

The power of words…fascinating.