As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from January 29, 2003, and March 18, 2003. This period was characterized by extreme geopolitical tension leading up to the Iraq War, which created significant volatility in energy markets and business confidence.
The Federal Open Market Committee decided today to keep its target for the federal funds rate unchanged at 1-1/4 percent.
While incoming economic data since the January meeting have been mixed, recent labor market indicators have proven disappointing. However, the hesitancy of the economic expansion appears to owe importantly to ~~Oil price premiums and other aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses. However, the Committee believes that as those risks lift, as most analysts expect, the accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide support to an improving economic climate over time.~~ oil price premiums and other aspects of geopolitical uncertainties. The Committee believes that as those uncertainties lift, as most analysts expect, the accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide support to economic activity sufficient to engender an improving economic climate over time.
In light of the unusually large uncertainties clouding the geopolitical situation in the short run and their apparent effects on economic decisionmaking, the Committee does not believe it can usefully characterize the current balance of risks with respect to the prospects for its long-run goals of price stability and sustainable economic growth. Rather, the Committee decided to refrain from making that determination until some of those uncertainties abate. In the current circumstances, heightened surveillance is particularly informative. ~~In these circumstances, the Committee believes 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 balanced with respect to the prospects for both goals for the foreseeable future.~~
Voting for the FOMC monetary policy action were Alan Greenspan, Chairman; William J. McDonough, Vice Chairman; Ben S. Bernanke; Susan S. Bies; J. Alfred Broaddus, Jr.; Roger W. Ferguson, Jr.; Edward M. Gramlich; Jack Guynn; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; and Robert T. Parry.
| Removed | Added | Significance |
|---|---|---|
| "Risks have reportedly fostered continued restraint on spending and hiring" | "Incoming economic data... have been mixed, recent labor market indicators have proven disappointing" | Shift from theoretical restraint to empirical evidence of weakness in the labor market. |
| "Risks" (in context of geopolitical events) | "Uncertainties" | Subtle shift in terminology; "uncertainty" implies an inability to model outcomes, justifying a "wait-and-see" approach. |
| "The risks are balanced with respect to the prospects for both goals" | "Does not believe it can usefully characterize the current balance of risks... refrain from making that determination" | Major shift. The Fed is withdrawing its "balanced" outlook, signaling that the environment is too volatile to commit to a specific risk bias. |
Inflation
There is a notable absence of specific inflation commentary in the March statement. While the January statement mentioned "price stability" as part of a balanced risk profile, the March statement explicitly refuses to characterize the balance of risks. This suggests that while inflation may not be the primary concern, the volatility of oil prices makes the inflation outlook too unpredictable to quantify.
Labor Markets & Growth
There is a clear deterioration in the Committee's view of the real economy. The January statement spoke of "restraint" (a behavioral choice by businesses); the March statement speaks of "disappointing" labor market indicators (a realized economic outcome). The addition of the phrase "hesitancy of the economic expansion" suggests the Fed is now observing a tangible slowdown in GDP growth.
Forward Guidance
The Committee has moved from a position of relative confidence ("risks are balanced") to a position of strategic ambiguity. By stating they will "refrain from making that determination" regarding the balance of risks, the Fed is creating maximum flexibility. They are signaling that they are in "heightened surveillance" mode, which allows them to pivot aggressively if the geopolitical situation worsens or the labor market continues to slide.
The Committee has shifted Dovish.
While the federal funds rate remained unchanged, the underlying rhetoric shifted from a "balanced" outlook to an admission that labor market data is "disappointing" and the expansion is "hesitant." Most critically, by removing the claim that risks are balanced and replacing it with a refusal to characterize the risk profile due to "unusually large uncertainties," the Fed has effectively removed the "hawkish" anchor of price stability from the immediate conversation. This creates the necessary linguistic runway for future rate cuts should the "disappointing" labor data persist.