As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from February 2, 2005, and March 22, 2005. This period represents a classic "measured pace" tightening cycle under Chairman Alan Greenspan.
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 2-3/4 percent ~~2-1/2 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. Output ~~appears to be growing at a moderate pace~~ evidently continues to grow at a solid pace despite the rise in energy prices, and labor market conditions continue to improve gradually. ~~Inflation and~~ Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices.
The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability ~~for the next few quarters to be~~ should be kept roughly equal. With underlying inflation expected to be ~~relatively low~~ contained, 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; Jack Guynn; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.
In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 3-3/4 percent ~~3-1/2 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 |
|---|---|---|
| "appears to be growing at a moderate pace" | "evidently continues to grow at a solid pace" | Bullish Growth: Shift from "moderate" to "solid" and "appears" to "evidently" indicates higher confidence in economic strength. |
| "Inflation... remain well contained" | "pressures on inflation have picked up... pricing power is more evident" | Inflationary Alarm: Explicit acknowledgment of rising price pressures and corporate pricing power. |
| (N/A) | "The rise in energy prices... has not notably fed through to core consumer prices" | Nuance: Distinguishing between headline (energy) and core inflation to justify the "measured" pace. |
| "for the next few quarters to be" | "with appropriate monetary policy action... should be kept" | Active Management: Shifts from a passive observation of risks to an active assertion that policy must act to balance those risks. |
| "relatively low" | "contained" | Tonal Shift: "Relatively low" is more optimistic; "contained" implies a state that requires active effort to maintain. |
Inflation
There is a marked shift in the characterization of inflation. In February, inflation was simply "well contained." By March, the Committee admits that "pressures on inflation have picked up" and, crucially, that "pricing power is more evident." This is a significant signal; "pricing power" suggests that inflation is moving from a cost-push phenomenon (energy prices) to a demand-pull phenomenon, which typically necessitates more aggressive rate hikes.
Labor Markets & Growth
The Committee has upgraded its assessment of economic growth. The transition from "moderate pace" to "solid pace" suggests the economy is running closer to (or above) its potential. While the labor market description remains unchanged ("improve gradually"), the overall growth narrative has shifted from cautious optimism to confirmed strength.
Forward Guidance
The guidance remains committed to a "measured" pace, but the logic has shifted. The February statement viewed the balance of risks as "roughly equal" by default. The March statement asserts that risks should be kept equal "with appropriate monetary policy action." This implies that without further hikes, the balance would tilt toward the upside (inflation).
Verdict: Hawkish
The Committee has shifted decisively Hawkish. While the 25bps hike is consistent with the previous meeting, the supporting text provides a much stronger justification for future tightening. By upgrading growth from "moderate" to "solid" and explicitly noting that "pricing power is more evident," the Fed is signaling that the economy is heating up. The change in the risk assessment—from a passive observation to a statement that policy action is required to keep risks balanced—indicates that the Committee is now more concerned about inflation than it was in February.