As a senior economist and central bank strategist, I have conducted a comparative analysis of the FOMC statements from December 9, 2003, and January 28, 2004.
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 output is expanding briskly, ~~and the labor market appears to be improving modestly~~ . Although new hiring remains subdued, other indicators suggest an improvement in the labor market. Increases in core consumer prices are 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. 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~~ it can be patient in removing its policy accommodation.
Voting for the FOMC monetary policy action were: [List of members updated for 2004].
| Removed | Added | Significance |
|---|---|---|
| "...and the labor market appears to be improving modestly." | "Although new hiring remains subdued, other indicators suggest an improvement..." | Nuanced Labor View: Shifts from a general "modest improvement" to a specific acknowledgment of a "jobless recovery" (subdued hiring) while remaining optimistic on other metrics. |
| "However," | [Removed] | Tonal Shift: Removes the contrast between inflation risks and the decision to stay accommodative, making the transition to the policy stance more direct. |
| "...policy accommodation can be maintained for a considerable period." | "...it can be patient in removing its policy accommodation." | Pivot in Guidance: This is the most critical change. Moving from "maintaining" to "removing" signals that the Committee is now thinking about the exit strategy, even if they intend to be "patient." |
Inflation
There is no change in the characterization of inflation. The Committee maintains that core prices are "muted" and that the risk of deflation is now roughly equal to the risk of inflation. This suggests that the "inflation floor" has been established, removing the primary justification for emergency-level low rates.
Labor Markets & Growth
The Committee remains confident in output ("expanding briskly"), but the language regarding the labor market has become more granular. By explicitly mentioning that "new hiring remains subdued," the Fed is acknowledging the lag in employment recovery. However, by stating other indicators suggest improvement, they are signaling that the broader economy is strong enough to withstand a gradual tightening of policy.
Forward Guidance
There is a significant shift in the "term of art" used for forward guidance. The previous statement promised that accommodation would be "maintained," which is a static commitment. The current statement discusses "removing" accommodation, which is a dynamic commitment. While the word "patient" is used to soothe markets, the conceptual shift from maintaining to removing is a clear signal of a future tightening cycle.
Verdict: Hawkish Shift
While the Committee kept the federal funds rate unchanged at 1%, the statement is decisively more hawkish than its predecessor. The pivot from "maintaining" policy accommodation to being "patient in removing" it is a classic central bank signal. It transforms the narrative from one of "support" to one of "exit." By acknowledging that inflation risks are balanced and output is brisk, the Committee has laid the intellectual groundwork for future rate hikes, effectively ending the era of open-ended accommodation.