As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from September 21, 2004, and November 10, 2004.
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 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. ~~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.~~ Output appears to be growing at a moderate pace despite the rise in energy prices, and labor market conditions have improved. ~~Despite the rise in energy prices, inflation and inflation expectations have eased in recent months.~~ Inflation and longer-term inflation expectations remain well contained.
The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters to be roughly equal. With underlying inflation 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 3 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, ~~and Kansas City. Dallas, and San Francisco.~~ Kansas City.
| Removed | Added | Significance |
|---|---|---|
| "1-3/4 percent" | "2 percent" | Execution of a 25bps hike; continuing the tightening cycle. |
| "After moderating... regained some traction" | "growing at a moderate pace" | Shift from describing a recovery of growth to describing a steady state of growth. |
| "improved modestly" | "have improved" | Removal of the qualifier "modestly" suggests higher confidence in labor market strength. |
| "inflation... have eased in recent months" | "remain well contained" | Shift from describing a downward trend to describing a stable, low level. |
| "2-3/4 percent" | "3 percent" | Parallel increase in the discount rate to maintain the spread. |
Inflation
The Committee has shifted its language from a "dynamic" view to a "static" view. In September, the Fed noted that inflation had "eased," implying a recent decline. By November, they describe inflation as "well contained." This suggests the Committee is no longer looking for further easing of price pressures but is satisfied that inflation is anchored, providing them the "green light" to continue raising rates.
Labor Markets & Growth
There is a subtle but important upgrade in the assessment of the real economy. The removal of the word "modestly" regarding labor market improvements and the transition from "regaining traction" to "growing at a moderate pace" indicates that the Fed views the economic expansion as more solidified and less fragile than it did two months prior.
Forward Guidance
The forward guidance remains remarkably consistent. The phrases "roughly equal" risks and "pace that is likely to be measured" are carried over verbatim. This indicates that while the Fed is confident enough to hike, they are not yet ready to accelerate the pace of tightening or signal a "hawkish" pivot toward aggressive hikes.
Verdict: Slightly Hawkish
The Committee has shifted slightly Hawkish. While the forward guidance remains "measured," the underlying economic assessment has been upgraded. By removing qualifiers like "modestly" and "regained some traction," the Fed is signaling that the economy is stronger and more resilient to energy price shocks than previously stated. When a central bank upgrades its view of growth and labor strength while maintaining that inflation is "contained," it creates the fundamental justification for the continued removal of policy accommodation. The tone is one of quiet confidence in the economy's ability to absorb higher rates.