As a senior economist and central bank strategist, I have analyzed the transition from the October 2nd to the November 6th, 2001, FOMC statements. This period represents a critical juncture in the post-9/11 economic response.
The Federal Open Market Committee decided today to lower its target for the federal funds rate by 50 basis points to 2 percent ~~2-1/2 percent~~. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 1-1/2 percent ~~2 percent~~.
~~The terrorist attacks have significantly heightened uncertainty in an economy that was already weak. Business and household spending as a consequence are being further damped.~~ Heightened uncertainty and concerns about a deterioration in business conditions both here and abroad are damping economic activity. ~~Nonetheless,~~ For the foreseeable future, then, 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~~.
Although the necessary reallocation of resources to enhance security may restrain advances in productivity for a time, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate.
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, Cleveland, Richmond, Atlanta, St. Louis, Kansas City and San Francisco~~ the request submitted by the Board of Directors of the Federal Reserve Bank of Richmond.
| Removed | Added | Significance |
|---|---|---|
| "The terrorist attacks..." | "Concerns about... business conditions both here and abroad" | Shift from attributing weakness to a specific event (9/11) to a broader systemic/global economic deterioration. |
| "Economy that was already weak" | "Damping economic activity" | Moves from a static description of weakness to a dynamic description of ongoing decline. |
| (Implicitly) Productivity optimism | "Reallocation of resources to enhance security may restrain advances" | Acknowledgment of a new structural drag (security costs) on the productivity growth engine. |
| List of 8 Fed Banks | Request from Richmond only | Administrative change regarding discount window requests. |
Inflation
Inflation is not explicitly mentioned by name, but the reference to "price stability" remains unchanged. The Committee is not expressing any inflation concerns; rather, the focus has shifted entirely toward the risk of deflationary pressure resulting from "economic weakness."
Labor Markets & Growth
There is a notable shift in the diagnosis of growth. In October, the Fed viewed the economy as "already weak" with spending being "damped." By November, the language evolves to "deterioration in business conditions both here and abroad." This indicates that the Fed is now seeing a broader, potentially global contagion of economic slowing, rather than just a domestic shock. Furthermore, the admission that security costs may "restrain advances in productivity" suggests the Fed is lowering its near-term expectations for the economy's supply-side efficiency.
Forward Guidance
The guidance remains aggressively accommodative. By cutting another 50 basis points, the Fed is signaling a "whatever it takes" approach to prevent a deep recession. The phrase "For the foreseeable future" is moved to the front of the risk assessment, strengthening the signal that the bias for policy will remain easing until the "unusual forces" abate.
Verdict: Strongly Dovish
The Committee has shifted further in a Dovish direction. Not only did they implement another aggressive 50bps cut, but the qualitative language has darkened. The shift from citing "terrorist attacks" to "deterioration... here and abroad" suggests the Fed perceives the downturn as becoming more systemic and less transitory. Most tellingly, the new caveat regarding security costs restraining productivity indicates that the Fed is preparing the markets for a slower recovery path, necessitating a longer period of low interest rates.