As a senior economist and central bank strategist, I have conducted a comparative analysis of the FOMC statements from October 28 and December 9, 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 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~~ output is expanding briskly, and the labor market appears to be ~~stabilizing~~ improving modestly. ~~Business pricing power and~~ Increases in core consumer prices remain muted and expected to remain low.
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.~~ The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. However, with inflation quite low and resource use slack, the Committee believes that policy accommodation can be maintained for a considerable period.
| Removed | Added | Significance |
|---|---|---|
| "spending is firming" | "output is expanding briskly" | Bullish Upgrade: Shift from a tentative recovery (firming) to strong growth (expanding briskly). |
| "stabilizing" | "improving modestly" | Positive Shift: The labor market has moved from a "stop-falling" phase to an active "growth" phase. |
| "Business pricing power" | "expected to remain low" | Forward-Looking: Removes mention of pricing power; adds a forecast that inflation will stay low. |
| "risk of inflation becoming undesirably low remains the predominant concern" | "probability of an unwelcome fall... has diminished... now appears almost equal to that of a rise" | Major Pivot: The deflationary fear (the primary driver of the 1% rate) is receding. |
| "In these circumstances" | "with inflation quite low and resource use slack" | Conditionality: Explicitly ties the "considerable period" of low rates to "slack" rather than just deflation risk. |
There is a profound shift in the Committee's perception of inflation risk. In October, the FOMC was explicitly worried about deflation ("predominant concern"). By December, that fear has "diminished." The Committee has moved from a skewed risk profile (downside risk $\gg$ upside risk) to a symmetric one (downside risk $\approx$ upside risk). This suggests the "deflationary ghost" is no longer the primary driver of policy.
The language regarding the real economy has been upgraded from "stabilizing" and "firming" to "expanding briskly" and "improving modestly." This indicates that the Committee is seeing a more robust recovery in GDP and employment than it did six weeks prior. The economy is no longer just "bottoming out"; it is gaining momentum.
While the punchline remains the same—policy accommodation will be maintained for a "considerable period"—the justification for that guidance has changed. In October, the justification was the risk of low inflation. In December, the justification is "resource use slack." This is a subtle but important shift: the Fed is moving from a "crisis-fighting" mode (fighting deflation) to a "cycle-management" mode (waiting for the output gap to close).
Tonal Shift: Mildly Hawkish
While the Committee kept rates unchanged and maintained the "considerable period" guidance, the underlying tone has shifted toward the hawkish side. The Fed has upgraded its assessment of growth ("expanding briskly") and, most importantly, has significantly dialed back its alarm regarding deflation. By stating that the risk of falling inflation has "diminished" and is now equal to the risk of rising inflation, the Committee is removing the primary intellectual pillar that supported the ultra-low 1% rate. The shift from "deflation fear" to "resource slack" suggests that the Fed is beginning to lay the groundwork for future rate hikes once that slack is absorbed.