As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from August 12, 2003, and September 16, 2003.
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 1 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. The evidence accumulated over the intermeeting period confirms ~~shows~~ that spending is firming, although ~~labor market indicators are mixed~~ the labor market has been weakening. 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 fall in inflation exceeds that of a rise in inflation from its already low level. The Committee judges that, on balance, the risk of inflation becoming undesirably low ~~is likely to be~~ remains 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; Robert T. Parry; and Jamie B. Stewart, Jr.
| Removed | Added | Significance |
|---|---|---|
| "still-" | (Removed) | Subtle shift; removes the emphasis on the persistence of productivity growth, treating it as a baseline fact. |
| "shows" | "confirms" | Increases the level of confidence in the data regarding spending trends. |
| "labor market indicators are mixed" | "the labor market has been weakening" | High Significance. A shift from ambiguity to a definitive negative assessment of employment. |
| "is likely to be" | "remains" | Shifts the inflation risk from a prediction to a confirmed state. |
Inflation
The Committee’s view on inflation is remarkably stable, but the language has shifted from probabilistic to definitive. By changing "is likely to be" to "remains," the Committee is signaling that the threat of deflation (or undershooting the target) is no longer a forecast, but a current reality. This reinforces the justification for keeping rates at the floor.
Labor Markets & Growth
This is the most critical area of divergence. In August, the Committee described labor indicators as "mixed," which allows for a neutral interpretation. By September, they explicitly state the labor market "has been weakening." While they "confirm" that spending is firming (a positive for growth), the explicit admission of labor weakness suggests that the recovery is unbalanced and that the "human" side of the economy is lagging behind the "spending" side.
Forward Guidance
The forward guidance remains unchanged: "policy accommodation can be maintained for a considerable period." However, the supporting evidence for this guidance has strengthened. By confirming labor weakness and the persistence of low inflation, the Committee is effectively "locking in" the 1% rate and signaling that there is no immediate catalyst for a rate hike.
The Committee has shifted Dovish.
While the target rate remained unchanged at 1%, the underlying narrative shifted toward a more pessimistic view of the labor market ("weakening" vs. "mixed") and a more certain view of inflation risks ("remains" vs. "is likely to be"). By upgrading the certainty of the risks to the downside, the FOMC has provided itself with more intellectual cover to keep rates low for longer. The transition from "mixed" indicators to "weakening" labor markets is a classic dovish signal, suggesting that the Committee is more concerned about employment than it was a month prior.