As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from November 10, 2004, and December 14, 2004. This period is characterized by the "measured pace" tightening cycle of the Greenspan era.
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 2-1/4 percent ~~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. Output appears to be growing at a moderate pace despite the ~~rise~~ earlier rise in energy prices, and labor market conditions ~~have improved~~ continue to improve gradually. 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 3-1/4 percent ~~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.
In addition, the Committee unanimously decided to expedite the release of its minutes. Beginning with this meeting, the minutes of regularly scheduled meetings will be released three weeks after the date of the policy decision. The first set of expedited minutes will be released at 2 p.m. EST on January 4, 2005.
| Removed | Added | Significance |
|---|---|---|
| 2 percent / 3 percent | 2-1/4 percent / 3-1/4 percent | Execution of a 25bps hike; continuation of the tightening cycle. |
| "rise in energy prices" | "earlier rise in energy prices" | Suggests energy price shocks are stabilizing or receding. |
| "have improved" | "continue to improve gradually" | Shifts from a retrospective observation to a trend-based outlook; implies a slower, more sustainable pace of tightening. |
| (Various Fed Banks) | Dallas and San Francisco | Administrative update to the discount window requests. |
| (N/A) | Expedited release of minutes | A significant shift toward transparency and communication strategy. |
Inflation
The characterization of inflation remains static ("well contained"). However, the subtle shift from "rise in energy prices" to "earlier rise" indicates that the Committee no longer views energy price volatility as an active, escalating threat to price stability, but rather as a past event.
Labor Markets & Growth
There is a nuanced shift in the description of the labor market. Moving from "have improved" (a completed action) to "continue to improve gradually" (an ongoing process) suggests the Committee sees the labor market as still having slack. This provides the Committee with more "room" to keep rates lower for longer, as the improvement is not yet seen as overheating.
Forward Guidance
The core guidance remains unchanged: the "measured" pace of removal of accommodation is maintained. The most striking shift is not in the economic guidance, but in the operational guidance. By expediting the release of minutes, the Committee is signaling a move toward greater transparency, likely to reduce market volatility by providing the rationale for their "measured" approach sooner.
Verdict: Neutral to Slightly Dovish
While the Committee took a Hawkish action (raising rates by 25 basis points), the textual tone shifted slightly toward the Dovish side. The transition from "improved" to "improve gradually" regarding the labor market suggests a lack of urgency to accelerate the hiking cycle. Furthermore, the reference to the "earlier" rise in energy prices suggests a diminishing fear of cost-push inflation. The Committee is effectively saying: "We are raising rates as planned, but we see no reason to speed up because the economy is improving slowly and inflation pressures are fading."