As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from May 6, 2003, and June 25, 2003.
The Federal Open Market Committee decided today to lower ~~to keep~~ its target for the federal funds rate ~~unchanged at 1-1/4 percent~~ by 25 basis points to 1 percent. In a related action, the Board of Governors approved a 25 basis point reduction in the discount rate to 2 percent.
~~Recent readings on production and employment, though mostly reflecting decisions made before the conclusion of hostilities, have proven disappointing. However, the ebbing of geopolitical tensions has rolled back oil prices, bolstered consumer confidence, and strengthened debt and equity markets. These developments, along with the accommodative stance of monetary policy and ongoing growth in productivity, should foster an improving economic climate over time.~~ The Committee continues to believe that an accommodative stance of monetary policy, coupled with still robust underlying growth in productivity, is providing important ongoing support to economic activity. Recent signs point to a firming in spending, markedly improved financial conditions, and labor and product markets that are stabilizing. The economy, nonetheless, has yet to exhibit sustainable growth. With inflationary expectations subdued, the Committee judged that a slightly more expansive monetary policy would add further support for an economy which it expects to improve over time.
~~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~~ of an unwelcome substantial fall in inflation 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.~~ On balance, the Committee believes that the latter concern [deflation] is likely to predominate 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.~~ and Jamie B. Stewart, Jr.
Voting against the action was Robert T. Parry. President Parry preferred a 50 basis point reduction in the target for the federal funds rate.
In taking the discount rate action, the Federal Reserve Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, St. Louis, Kansas City, and San Francisco.
| Removed | Added | Significance |
|---|---|---|
| "keep... unchanged at 1-1/4 percent" | "lower... by 25 basis points to 1 percent" | Policy Shift: Transition from a hold to an active easing cycle. |
| References to "hostilities" and "geopolitical tensions" | "firming in spending," "labor and product markets... stabilizing" | Narrative Shift: Moving from external shock analysis to internal economic data. |
| "balance of risks... weighted toward weakness" | "the latter concern [deflation] is likely to predominate" | Risk Re-weighting: Explicitly prioritizing the risk of deflation over growth. |
| Unanimous voting block | Dissent by Robert T. Parry (wanted -50bps) | Internal Tension: Indicates a wing of the committee viewed the 25bps cut as too timid. |
Inflation
The Committee remains preoccupied with the downside risk of inflation. While the May statement noted the probability of a fall in inflation was "minor," the June statement elevates this, stating that the risk of a "substantial fall in inflation" is likely to predominate. This is a critical shift; the Fed is no longer just acknowledging deflationary risk—it is making it the primary driver of policy.
Labor Markets & Growth
There is a noticeable transition from pessimism to cautious optimism. The May statement described production and employment as "disappointing." By June, the language shifts to "stabilizing" and "firming in spending." However, the Committee maintains a guardrail by explicitly stating the economy "has yet to exhibit sustainable growth," justifying the need for further stimulus.
Forward Guidance
The guidance has shifted from "observational" to "actionable." In May, the Committee was waiting for an "improving economic climate." In June, they have moved to actively create that climate via a "slightly more expansive monetary policy." The inclusion of the discount rate cut further signals a desire to ensure broad liquidity.
Verdict: Decidedly Dovish
The shift is unambiguous. The Committee moved from a "hold" to a "cut," transitioned its risk assessment from general "weakness" to a specific fear of deflation ("predominate"), and adopted more expansive language regarding the need for policy support. The presence of a dissent from President Parry—who argued for an even larger cut (50bps)—further underscores the dovish tilt of the meeting, suggesting that the 25bps cut was actually the "conservative" move within a committee leaning heavily toward easing.