May 10 (Bloomberg) -- Unless there's a definitive shift in economic data before Federal Reserve officials meet next month, they might just as well issue the same statement they put out yesterday when they left the interest rate at 5.25 percent.

The Federal Open Market Committee's statement explaining its action was virtually identical to the one issued after its previous meeting on March 9. The FOMC's ``predominant policy concern remains the risk that inflation will fail to moderate as expected,'' the statement said.

The FOMC next meets in seven weeks, on June 27 and 28, when they will revise their forecasts for 2007 and 2008.

The lending rate target was raised in 17 quarter-percentage point steps and has been at its current level since June 2006. That cumulative tightening to keep inflation under control began to bite in the middle of last year.

Since then, there has been a tug of war going on between economic growth and inflation, which together add up to current- dollar gross domestic product. As is often the case after a major increase in rates engineered by the Fed, growth initially slows more than inflation.

Growth ran at an average annual rate of less than 2.5 percent in the second half of 2006, and it dipped to a 1.3 percent rate in the first quarter of this year. Much of the slower growth has been caused by weakness in the housing sector, which the FOMC described as an ``ongoing'' adjustment.

Officials still expect growth to improve in the second half of the year, and while ``core inflation remains somewhat elevated,'' it seems ``likely to moderate over time,'' the statement said.

Preferred Measure

The FOMC's preferred measure of core inflation, which excludes food and energy prices, is the personal consumption expenditure price index.

Mickey D. Levy, chief economist at Banc of America Securities, argued in an analysis sent to clients on April 25 that that moderation is indeed likely because current-dollar, or nominal, GDP isn't rising nearly as fast as it was prior to mid- 2006.

``Inflation is set to fall in lagged response to the significant deceleration of nominal GDP growth and the associated squeeze of excess demand relative to productive capacity,'' Levy said. ``We expect core inflation to recede below 2 percent in the not so distant future.''

The excess demand was generated in the first place by the massive easing in monetary policy beginning in 2001 during which the lending rate target was reduced to just 1 percent in June 2003 and kept there for a year, Levy said.

``That trend is in the process of reversing,'' he said.

Uncertain Timing

``The exact timing of the decline in inflation is uncertain, as the lags between trend shifts in excess demand and inflation can vary, but we expect that the receding inflation trend will be apparent in the second half of the year,'' Levy said.

Nominal GDP increased at a 6.8 percent rate for several years and then slowed to a 4 percent rate in the second half of 2006, and the deceleration is continuing this year, he said.

Fed officials undoubtedly hope Levy is right. Their own forecasts generally don't incorporate such a slowing in core inflation as soon as Levy expects.

Economist Kenneth T. Mayland of ClearView Economics is much more skeptical about core inflation decreasing.

``The historical fact is that `slowdown' must be imposed on the economy to reverse a cyclical run-up of core inflation,'' Mayland said after the FOMC announcement. ``Have we seen enough `slowdown' yet, in both time and magnitude? Probably not.''

Closing Window

Mayland said the housing and inventory adjustments, which have been at the heart of slower economic growth, ``are being put behind us. I think they are more than half over.''

As a result, he expects growth to pick up. ``The window is closing for all the right pieces to fall into place favoring rate cuts,'' he said. ``Before the end of this year, I think the market will begin to price in 2008 interest rate increases.''

Well, there was another sentence in the FOMC statement that was unchanged yesterday: ``Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.''

Keep in mind that, as the sentence says, it's the impact of data on the outlook -- that is, the collective forecasts of FOMC participants -- that matters.

For officials to begin thinking seriously about reducing the lending rate target, as more than a few analysts are projecting for later this year, there would have to be both a distinct softening of the labor market and some evidence that inflation indeed is moderating.

(John M. Berry is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: John M. Berry in Washington at jberry5@bloomberg.net.

Last Updated: May 10, 2007 00:14 EDT