As a senior economist and central bank strategist, I have conducted a comparative analysis of the FOMC statements from September 16, 2003, and October 28, 2003.
While the Federal Funds Rate remained unchanged at 1%, the subtle linguistic shift in the assessment of the labor market provides critical insight into the Committee's evolving outlook.
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 robust underlying growth in productivity, is providing important ongoing support to economic activity. The evidence accumulated over the intermeeting period confirms that spending is firming, ~~although the labor market has been weakening~~ and the labor market appears to be stabilizing. 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 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 |
|---|---|---|
| "although the labor market has been weakening" | "and the labor market appears to be stabilizing" | Major. Shifts the labor market narrative from a headwind (weakening) to a neutral/positive trend (stabilizing). |
Inflation
* No Change. The language regarding inflation remains identical. The Committee continues to view the risk of deflation (inflation becoming "undesirably low") as the primary threat, justifying the current accommodative stance.
Labor Markets & Growth
* Significant Shift. In September, the Committee noted a dichotomy: spending was firming, but the labor market was weakening. By October, this dichotomy is resolved into a unified positive trend: spending is firming and the labor market is stabilizing. This suggests the "bottom" of the labor market cycle may have been reached.
Forward Guidance
* No Change. The commitment to maintain policy accommodation for a "considerable period" remains intact. There is no signal of an imminent rate hike, despite the improvement in labor market data.
The Committee has shifted Mildly Hawkish (or "Less Dovish").
While the policy rate remained unchanged and the forward guidance remained accommodative, the removal of the phrase "labor market has been weakening" in favor of "appears to be stabilizing" is a meaningful upgrade in the economic assessment. In central bank communications, moving from a "weakening" to a "stabilizing" labor market reduces the urgency for further stimulus and lays the conceptual groundwork for future normalization. However, because the inflation risks remain "the predominant concern," the Committee is not yet ready to signal a pivot.