To: FOMC Policy Committee / Board of Governors
From: Senior Economist & Central Bank Strategist
Date: December 12, 2006
Subject: Comparative Analysis of Monetary Policy Statements (Oct 25 vs. Dec 12)
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
Economic growth has slowed over the course of the year, partly reflecting a ~~cooling~~ substantial cooling of the housing market. ~~Going forward,~~ Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters.
Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.
Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; William Poole; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.
| Removed | Added | Significance |
|---|---|---|
| "cooling" | "substantial cooling" | Escalation of the perceived severity of the housing market downturn. |
| "Going forward" | "Although recent indicators have been mixed... on balance over coming quarters" | Introduction of uncertainty and a more cautious, qualified outlook on GDP growth. |
Inflation
There is zero change in the inflation narrative. The Committee maintains its "wait-and-see" approach, acknowledging that while core inflation is elevated and resource utilization is high, the trajectory is expected to moderate. The persistence of this exact phrasing suggests that inflation is not currently the primary driver of the Committee's immediate anxiety.
Labor Markets & Growth
There is a notable shift toward increased concern regarding growth. The addition of the word "substantial" to describe the housing market cooling indicates that the Committee now views the real estate correction as a more significant drag on the broader economy than it did in October. Furthermore, replacing the confident "Going forward" with "Although recent indicators have been mixed" and "on balance" signals a loss of conviction in the growth trajectory. The Committee is now admitting to a lack of clarity in the data.
Forward Guidance
The forward guidance remains static. The Committee continues to leave the door open for "additional firming" (rate hikes) but ties this strictly to incoming information. However, when read in conjunction with the weakened growth language, the "additional firming" now appears less likely in the immediate term.
The Committee has shifted Slightly Dovish.
While the federal funds rate remained unchanged and the inflation language was held constant, the Committee significantly downgraded its assessment of the housing market and introduced nuance regarding the uncertainty of economic growth. By characterizing the housing cooling as "substantial" and the data as "mixed," the Committee is building a narrative justification for a pause or a future pivot. Despite Jeffrey Lacker's continued hawkish dissent (preferring a 25bps hike), the majority of the Committee is signaling that economic headwinds are mounting, which reduces the urgency for further tightening.