As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from March 18, 2003, and May 6, 2003. This period is critical as it marks the transition from the immediate uncertainty of the Iraq War onset to the early recovery phase.
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.~~ Recent readings on production and employment, though mostly reflecting decisions made before the conclusion of hostilities, have proven disappointing. However, ~~the hesitancy of the economic expansion appears to owe importantly to oil price premiums and other aspects of geopolitical uncertainties.~~ the ebbing of geopolitical tensions has rolled back oil prices, bolstered consumer confidence, and strengthened debt and equity markets. ~~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.~~ These developments, along with the accommodative stance of monetary policy and ongoing growth in productivity, should foster 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.~~ Although the timing and extent of that improvement remain uncertain, the Committee perceives that over the next few quarters the upside and downside risks to the attainment of sustainable growth are roughly equal. In contrast, over the same period, the probability of an unwelcome substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level. The Committee believes that, taken together, the balance of risks to achieving its goals is weighted toward weakness over 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 |
|---|---|---|
| "Incoming economic data... have been mixed" | "Readings on production and employment... reflecting decisions made before the conclusion of hostilities" | Shifts the narrative from "mixed data" to a specific lag effect; acknowledges the war's end as a catalyst. |
| "Hesitancy... owe importantly to oil price premiums" | "Ebbing of geopolitical tensions has rolled back oil prices... bolstered confidence" | Moves from identifying a problem (oil premiums) to identifying a solution (ebbing tensions). |
| Refusal to characterize the balance of risks due to uncertainty. | "Balance of risks... is weighted toward weakness over the foreseeable future." | Major Shift: The Committee has moved from "wait-and-see" to an explicit admission of downside risk. |
| General mention of "price stability." | "Probability of an unwelcome substantial fall in inflation... exceeds that of a pickup." | Explicitly flags deflationary risk as the primary inflation concern. |
In the March statement, inflation was subsumed under the general "long-run goals of price stability." By May, the Committee has become explicit: they are more concerned about a "substantial fall in inflation" (deflationary pressure) than a pickup. This indicates that the "low level" of inflation is now viewed as a risk factor rather than a success, signaling a desire to keep policy accommodative to prevent a deflationary spiral.
The characterization of the labor market remains "disappointing," but the context has changed. In March, the weakness was a symptom of geopolitical uncertainty. In May, the Committee acknowledges that while current data is poor, it is a "lagging" indicator reflecting decisions made before the conclusion of hostilities. This suggests the Committee believes the worst is over, but the recovery is not yet visible in the hard data.
The most significant shift is the move from strategic ambiguity to explicit risk assessment. In March, the FOMC stated it "does not believe it can usefully characterize" the balance of risks. In May, they provide a detailed risk matrix:
1. Growth: Upside and downside risks are "roughly equal."
2. Inflation: Downside risk outweighs upside risk.
3. Aggregate: The overall balance is "weighted toward weakness."
This is a classic central bank signal that they are prepared to keep rates low or cut them further if the "weight toward weakness" manifests.
The Committee has shifted decidedly Dovish.
While the target rate remained unchanged, the textual evidence is clear: the FOMC moved from a position of "heightened surveillance" (neutral/uncertain) to an explicit declaration that the balance of risks is "weighted toward weakness." By specifically highlighting the risk of a "substantial fall in inflation" and acknowledging that growth risks remain precarious, the Committee has laid the intellectual groundwork for further easing. They have transitioned from blaming external geopolitical shocks to admitting an internal economic vulnerability.