As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from June 25, 2003, and August 12, 2003. This period represents a critical juncture in the post-dot-com bubble recovery where the Committee was balancing a fragile recovery against the risk of deflation.
The Federal Open Market Committee decided today to ~~lower its target for the federal funds rate by 25 basis points to~~ keep its target for the federal funds rate at 1 percent. ~~In a related action, the Board of Governors approved a 25 basis point reduction in the discount rate to 2 percent.~~
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.~~ The evidence accumulated over the intermeeting period shows that spending is firming, although labor market indicators are mixed. Business pricing power and increases in core consumer prices remain muted.
The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome ~~substantial~~ fall in inflation exceeds that of a ~~pickup~~ rise in inflation from its already low level. ~~On balance, the Committee believes that the latter concern is likely to predominate for the foreseeable future.~~ The Committee judges that, on balance, the risk of inflation becoming undesirably low is likely to be the predominant concern for the foreseeable future. In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period.
Voting for the FOMC monetary policy action were ~~Alan Greenspan, 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 Jamie B. Stewart, Jr.~~ : Alan Greenspan, 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; 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 |
|---|---|---|
| "lower its target... by 25 bps" | "keep its target... at 1 percent" | Shift from active easing to a "pause" or hold. |
| "economy... yet to exhibit sustainable growth" | "labor market indicators are mixed" | Acknowledgment that recovery is uneven; less urgency for immediate cuts. |
| "slightly more expansive monetary policy" | "policy accommodation can be maintained for a considerable period" | Transition from increasing stimulus to sustaining current stimulus. |
| "substantial fall in inflation" | "inflation becoming undesirably low" | Refinement of deflationary risk language; more explicit concern. |
| Robert T. Parry (Voting against) | Robert T. Parry (Voting for) | Achievement of committee consensus; end of the internal push for deeper cuts. |
Inflation
The Committee remains preoccupied with the downside risk of inflation. However, the language has shifted from a general "probability" of a fall in inflation to a more explicit judgment that the risk of inflation becoming "undesirably low" is the "predominant concern." The addition of "business pricing power... remain muted" provides the empirical justification for this concern, signaling that the Fed sees no immediate pressure to raise rates.
Labor Markets & Growth
There is a subtle but important cooling in the description of the recovery. In June, the Committee noted markets were "stabilizing." By August, they describe labor market indicators as "mixed." This suggests that while spending is firming, the employment recovery is lagging, which justifies keeping rates low even as the Committee stops actively cutting them.
Forward Guidance
This is the most significant shift. The June statement focused on the need for further support (justifying the cut). The August statement introduces a "lower for longer" signal: "policy accommodation can be maintained for a considerable period." This is a classic piece of forward guidance designed to lower long-term yields by assuring markets that the 1% rate is not a temporary floor but a sustained plateau.
The Committee has shifted from Active Dovishness to Steady Dovishness (Neutral-to-Dovish).
While the move from a rate cut to a rate hold is technically a "hawkish" move in isolation, the accompanying text is overwhelmingly dovish. By removing the urgency for "more expansive" policy and replacing it with a commitment to maintain accommodation for a "considerable period," the Fed is signaling a "pause" rather than a "pivot." Furthermore, the shift to a unanimous vote (including Robert Parry, who previously wanted deeper cuts) indicates that the Committee has reached a consensus that the current level of stimulus is sufficient, but that the risks to the economy remain skewed to the downside.