As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from May 3, 2005, and June 30, 2005.
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3-1/4 ~~3~~ 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. ~~Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices. Labor market conditions, however, apparently continue to improve gradually.~~ Although energy prices have risen further, the expansion remains firm and labor market conditions continue to improve gradually. ~~Pressures on inflation have picked up in recent months and pricing power is more evident.~~ Pressures on inflation have stayed elevated, but longer-term inflation expectations remain well contained.
The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be 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; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Edward M. Gramlich; 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 4-1/4 ~~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 |
|---|---|---|
| "Recent data suggest that the solid pace of spending growth has slowed somewhat..." | "Although energy prices have risen further, the expansion remains firm..." | Bullish Growth Outlook: The Fed has deleted the reference to a slowdown in spending, signaling higher confidence in economic resilience despite energy shocks. |
| "Pressures on inflation have picked up in recent months and pricing power is more evident." | "Pressures on inflation have stayed elevated..." | Inflation Persistence: Shifts from "picking up" (trend) to "stayed elevated" (plateau/persistence), justifying the continued rate hike cycle. |
| Target rate: 3% / Discount rate: 4% | Target rate: 3-1/4% / Discount rate: 4-1/4% | Tightening: Execution of a standard 25bps hike to normalize policy. |
Inflation
The Committee has shifted its characterization of inflation from a dynamic of acceleration ("picked up") to one of persistence ("stayed elevated"). By removing the specific mention of "pricing power," the Committee is slightly softening the description of the mechanism of inflation, but the core message remains that inflation is a primary concern requiring a restrictive bias.
Labor Markets & Growth
There is a notable upgrade in the growth narrative. In May, the Fed expressed concern that spending growth had "slowed somewhat" due to energy prices. By June, this caution is gone; the Committee now explicitly states the "expansion remains firm" despite energy prices rising further. This suggests the Fed believes the economy is less sensitive to energy shocks than previously feared, providing more "room" to raise rates.
Forward Guidance
The forward guidance remains remarkably stable. The phrases "pace that is likely to be measured" and "risks... kept roughly equal" are carried over verbatim. This indicates that while the current data is stronger, the Committee is not yet ready to accelerate the pace of hikes beyond 25bps increments.
Verdict: Hawkish
The Committee has shifted in a Hawkish direction. While the rate hike itself was expected, the accompanying text removes previous caveats regarding a slowdown in spending and replaces them with a confirmation that the expansion "remains firm." By acknowledging that energy prices have risen further without dampening growth, the Fed is signaling that the economy can withstand higher borrowing costs. The shift from "picking up" to "stayed elevated" regarding inflation confirms that the Committee views price pressures as a structural fixture rather than a transitory spike, justifying the continued removal of policy accommodation.