As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from May 4, 2004, and June 30, 2004. This period represents a critical phase of the "measured" tightening cycle following the 2001 recession.
The Federal Open Market Committee decided today to raise ~~keep~~ its target for the federal funds rate by 25 basis points to 1-1/4 percent ~~at 1 percent~~.
The Committee ~~continues to~~ believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ~~important~~ ongoing support to economic activity. The evidence accumulated over the intermeeting period indicates that output is continuing to expand at a solid ~~rate~~ pace and ~~hiring appears to have picked up~~ labor market conditions have improved. Although incoming inflation data ~~have moved somewhat higher~~ are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors. ~~long-term inflation expectations appear to have remained well contained.~~
The Committee perceives the upside and downside risks to the attainment of both sustainable growth ~~for the next few quarters are roughly equal. Similarly, the risks to the goal of price stability have moved into balance~~ and price stability for the next few quarters are roughly equal. ~~At this juncture, with inflation low and resource use slack,~~ With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.
Voting for the FOMC monetary policy actions were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Ben S. Bernanke; Susan S. Bies; Roger W. Ferguson, Jr.; Edward M. Gramlich; Thomas M. Hoenig; Donald L. Kohn; Cathy E. Minehan; Mark W. Olson; Sandra Pianalto; and William Poole.
In a related action, the Board of Governors approved a 25 basis point increase in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco.
| Removed | Added | Significance |
|---|---|---|
| "keep... at 1 percent" | "raise... by 25 basis points to 1-1/4 percent" | Action: Transition from a hold to an active tightening phase. |
| "hiring appears to have picked up" | "labor market conditions have improved" | Assessment: Shift from observing a trend (hiring) to confirming a state (improved conditions). |
| "inflation data have moved somewhat higher" | "inflation data are somewhat elevated... due to transitory factors" | Nuance: Acknowledges higher levels but attempts to "look through" them via the "transitory" label. |
| "risks... have moved into balance" | "risks to... both sustainable growth and price stability... are roughly equal" | Integration: Merges growth and inflation risks into a single balanced outlook. |
| "with inflation low and resource use slack" | "will respond to changes... to maintain price stability" | Guidance: Replaces a description of current slack with a formal commitment to price stability (Hawkish signal). |
Inflation
The Committee has shifted from observing that inflation is "moving higher" to describing it as "elevated." However, they have introduced a critical qualifying phrase: "transitory factors." This is a strategic move to justify the rate hike (acknowledging the elevation) while simultaneously signaling that they do not believe a rapid acceleration of hikes is necessary (attributing the rise to temporary noise).
Labor Markets & Growth
The language has evolved from a tentative observation ("hiring appears to have picked up") to a definitive conclusion ("labor market conditions have improved"). This suggests the Committee now views the labor market as sufficiently robust to absorb the impact of a 25bps rate increase without risking a recession.
Forward Guidance
The most significant shift is the addition of the "price stability" mandate clause. While the Committee maintains the "measured" pace of removal, the new sentence—"Nonetheless, the Committee will respond to changes in economic prospects as needed"—serves as a "hawkish hedge." It warns markets that the "measured" pace is not a guarantee and can be accelerated if inflation persists.
Verdict: Hawkish
The shift is clearly Hawkish. While the Committee continues to use the word "accommodative" and "measured" to avoid spooking the markets, the actual policy action (a 25bps hike) and the addition of the commitment to "maintain price stability" signal a transition. The Committee has moved from a posture of "monitoring and holding" to "active tightening," signaling that the era of ultra-low rates is ending as the economy reaches a state of sustainable growth.