As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from August 13, 2002, and September 24, 2002.
The Federal Open Market Committee decided today to keep its target for the federal funds rate unchanged at 1 3/4 percent.
~~The softening in the growth of aggregate demand that emerged this spring has been prolonged in large measure by weakness in financial markets and heightened uncertainty related to problems in corporate reporting and governance.~~ The information that has become available since the last meeting of the Committee suggests that aggregate demand is growing at a moderate pace.
Over time, the current accommodative stance of monetary policy, coupled with still robust underlying growth in productivity, should be sufficient to foster an improving business climate ~~over time~~. However, considerable uncertainty persists about the extent and timing of the expected pickup in production and employment owing in part to the emergence of heightened geopolitical risks.
~~Nonetheless~~ Consequently, the Committee believes that, for the foreseeable future, 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.
Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; William J. McDonough, Vice Chairman; Ben S. Bernanke; Susan S. Bies; Roger W. Ferguson, Jr.; ~~Edward M. Gramlich;~~ Jerry L. Jordan; Donald L. Kohn; ~~Robert D. McTeer, Jr.;~~ Mark W. Olson; Anthony M. Santomero, and Gary H. Stern.
Voting against the action were: Edward M. Gramlich and Robert D. McTeer, Jr.
Governor Gramlich and President McTeer preferred a reduction in the target for the federal funds rate.
| Removed | Added | Significance |
|---|---|---|
| Reference to "softening" demand and "corporate reporting/governance" issues. | "Aggregate demand is growing at a moderate pace." | Shift from diagnosing a specific cause of weakness to a general observation of current growth. |
| "Nonetheless" (as a transition to risk assessment). | "However... considerable uncertainty persists... heightened geopolitical risks." | Introduction of a new external risk factor (geopolitics) as a drag on the recovery. |
| "Nonetheless" | "Consequently" | Changes the logic: the risk of weakness is no longer a "despite" factor, but a direct result of the uncertainty mentioned. |
| Unanimous voting block. | Dissenting votes from Gramlich and McTeer. | Signals a fracture in the Committee; a growing minority believes the current rate is too high. |
Inflation
There is no explicit mention of inflation in either statement. However, the continued focus on "price stability" as a long-run goal, combined with the "accommodative stance," suggests that inflation was not a primary concern for the Committee at this time, allowing them to focus entirely on growth.
Labor Markets & Growth
The Committee has shifted its description of growth from "softening" (August) to "growing at a moderate pace" (September). While this sounds like a marginal improvement, it is offset by the new admission of "considerable uncertainty" regarding the "timing of the expected pickup in production and employment." The focus has shifted from internal corporate governance failures to external "geopolitical risks."
Forward Guidance
The guidance remains heavily data-dependent and skewed toward the downside. By changing "Nonetheless" to "Consequently," the Committee has strengthened the link between current geopolitical uncertainty and the likelihood of economic weakness. Most importantly, the emergence of two dissenting votes explicitly calling for a "reduction in the target" provides a strong signal to markets that the path of least resistance for the Fed is downward.
The Committee has shifted Dovish.
While the target rate remained unchanged, the internal dynamics of the FOMC have shifted significantly. The transition from a unanimous decision to one with two explicit dissents calling for a rate cut indicates that the "center of gravity" within the Committee is moving toward further easing. Furthermore, the introduction of "heightened geopolitical risks" as a justification for the risk of "economic weakness" provides the intellectual framework for future rate cuts. The tone has evolved from "waiting for a recovery" to "worrying about new risks," which typically precedes a loosening of monetary policy.