As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from August 10, 2004, and September 21, 2004.
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 1-3/4 percent. ~~1-1/2 percent.~~
The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. ~~In recent months, output growth has moderated and the pace of improvement in labor market conditions has slowed. This softness likely owes importantly to the substantial rise in energy prices. The economy nevertheless appears poised to resume a stronger pace of expansion going forward.~~ After moderating earlier this year partly in response to the substantial rise in energy prices, output growth appears to have regained some traction, and labor market conditions have improved modestly. ~~Inflation has been somewhat elevated this year, though a portion of the rise in prices seems to reflect transitory factors.~~ Despite the rise in energy prices, inflation and inflation expectations have eased in recent months.
The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters ~~are~~ to be roughly equal. 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 action 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 unanimously approved a 25 basis point increase in the discount rate to 2-3/4 percent. ~~2-1/2 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 |
|---|---|---|
| "Output growth has moderated... pace of improvement in labor market conditions has slowed." | "Output growth appears to have regained some traction, and labor market conditions have improved modestly." | Bullish Growth: Shift from observing "softness" to observing a recovery in momentum. |
| "Inflation has been somewhat elevated this year..." | "Inflation and inflation expectations have eased in recent months." | Disinflationary Signal: Explicitly notes a cooling of price pressures and expectations. |
| "The economy... appears poised to resume a stronger pace" | "After moderating... [growth] appears to have regained some traction" | Realization of Upside: Moves from a prediction of recovery to an observation of recovery. |
| "still expected to be relatively low" | "expected to be relatively low" | Minor Nuance: Removal of "still" slightly reduces the emphasis on the persistence of low inflation. |
Inflation
There is a notable shift in the characterization of price stability. In August, the Committee was concerned that inflation was "somewhat elevated," attributing some of it to transitory energy costs. By September, the tone has shifted to a more confident stance, stating that both inflation and—crucially—inflation expectations have "eased." This suggests the Committee is less worried about a wage-price spiral.
Labor Markets & Growth
The narrative has shifted from "softness" to "traction." The August statement highlighted a slowdown in labor market improvements and moderated growth. The September statement effectively "closes the book" on that period of softness, noting that the economy has already begun to recover from the energy price shocks.
Forward Guidance
The core guidance remains remarkably stable. The phrases "stance of monetary policy remains accommodative" and "removed at a pace that is likely to be measured" are preserved verbatim. This indicates that while the economic data has improved, the Committee is not yet ready to accelerate the pace of tightening beyond the current 25bps increments.
The Committee has shifted Hawkish, though the shift is nuanced.
While the language regarding inflation is technically "dovish" (noting that prices have eased), the overall macroeconomic narrative has shifted from one of "softness" and "moderation" to one of "regained traction" and "improvement." In the context of a central bank, a stronger economy with easing inflation provides the "green light" to continue raising rates. By confirming that the economy has weathered the energy price shock and is growing again, the Committee has strengthened the fundamental justification for the 25bps hike and the continued removal of policy accommodation.