As a senior economist and central bank strategist, I have analyzed the transition between the August 21 and September 17, 2001, FOMC statements. This period is historically critical, as it captures the immediate monetary response to the September 11 terrorist attacks.
The Federal Open Market Committee ~~at its meeting~~ decided today to lower its target for the federal funds rate by 50 ~~25~~ basis points to 3 percent. In a related action, the Board of Governors approved a 50 ~~25~~ basis point reduction in the discount rate to 2-1/2 percent. ~~Today's action by the FOMC brings the decline in the target federal funds rate since the beginning of the year to 300 basis points.~~ The Federal Reserve will continue to supply unusually large volumes of liquidity to the financial markets, as needed, until more normal market functioning is restored. As a consequence, the FOMC recognizes that the actual federal funds rate may be below its target on occasion in these unusual circumstances.
~~Household demand has been sustained, but business profits and capital spending continue to weaken and growth abroad is slowing, weighing on the U.S. economy. The associated easing of pressures on labor and product markets is expected to keep inflation contained.~~ Even before the tragic events of last week, employment, production, and business spending remained weak, and last week's events have the potential to damp spending further.
~~Although~~ Nonetheless, the long-term prospects for productivity growth and the economy remain favorable, and should become evident once the unusual forces restraining demand abate. ~~the Committee continues to believe that~~ For the foreseeable future, the Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness ~~in the foreseeable future~~.
In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of ~~Boston, New York, Philadelphia, Richmond, Chicago, Kansas City and Dallas~~ Richmond, Chicago, Minneapolis, Dallas, and San Francisco.
| Removed | Added | Significance |
|---|---|---|
| 25 bps cut | 50 bps cut | Aggressive Easing: Doubling the pace of rate cuts indicates a heightened sense of urgency. |
| Inflation containment language | "Tragic events of last week" / "Damp spending" | Pivot to Crisis Mgmt: Shift from analyzing inflation/labor to addressing an exogenous shock. |
| Standard target language | Liquidity provision / Target overshoot | Market Intervention: Explicit signal that the Fed will act as "Lender of Last Resort" to prevent systemic collapse. |
| "Household demand sustained" | "Employment, production... remained weak" | Deteriorating Outlook: Acknowledgment that the economy was weakening even prior to 9/11. |
Inflation
There is a complete disappearance of inflation-related commentary. In the August statement, the Committee noted that easing pressures would "keep inflation contained." By September 17, inflation is no longer a primary concern; it has been entirely superseded by the need to prevent a financial freeze and a deep recession.
Labor Markets & Growth
The narrative has shifted from a "softening" economy to a "weak" one. The August statement highlighted "sustained" household demand; the September statement removes this optimism, noting that employment and production were already weak and warning that the 9/11 attacks could "damp spending further." The focus has shifted from a cyclical slowdown to a crisis-driven contraction.
Forward Guidance
The guidance has shifted from standard interest rate targeting to liquidity management. The most critical addition is the commitment to supply "unusually large volumes of liquidity." By stating that the actual funds rate may fall below the target, the Fed is signaling that it will flood the system with cash to ensure the plumbing of the financial system does not seize up, regardless of the nominal target.
The Committee shifted decisively Dovish.
This is not a standard cyclical pivot, but a "crisis-mode" shift. The move from a 25bps to a 50bps cut, the removal of all mentions of inflation containment, and the explicit commitment to provide unlimited liquidity demonstrate an aggressive stance to support the economy. The tone has evolved from cautious monitoring of economic weakness to an urgent, proactive defense against a systemic financial shock.