As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from January 31, 2007, and March 21, 2007. This period is critical as it captures the early signals of the housing market collapse and the Committee's struggle to balance persistent inflation against emerging growth risks.
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
~~Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market.~~ Recent indicators have been mixed and the adjustment in the housing sector is ongoing. ~~Overall~~ Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.
~~Readings~~ Recent readings on core inflation have ~~improved modestly in recent months~~ been somewhat elevated. ~~and~~ Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain ~~inflation~~ those pressures.
~~The Committee judges that some inflation risks remain.~~ In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. ~~The extent and timing of any additional firming that may be needed to address these risks~~ Future policy adjustments 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;~~ Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh.
| Removed | Added | Significance |
|---|---|---|
| "somewhat firmer economic growth" / "tentative signs of stabilization" | "indicators have been mixed" / "adjustment... is ongoing" | Significant Downgrade: A pivot from optimism about a housing bottom to acknowledging a continuing decline. |
| "improved modestly" (regarding inflation) | "somewhat elevated" | Hawkish Shift: Inflation is no longer trending toward target; it is now viewed as stubbornly high. |
| "some inflation risks remain" | "predominant policy concern... inflation will fail to moderate" | Increased Urgency: Elevates inflation from a "risk" to the "predominant concern." |
| "extent and timing of any additional firming" | "Future policy adjustments" | Neutralization: Removes the explicit bias toward "firming" (hiking), opening the door for a pause or cut. |
There is a marked shift in the characterization of inflation. In January, the Committee noted that readings had "improved modestly," suggesting a trajectory toward the target. By March, this has been replaced with "somewhat elevated." More importantly, the Committee has moved from acknowledging "some risks" to stating that the "predominant policy concern" is the failure of inflation to moderate. This indicates that the Fed was seeing a "sticky" inflation profile despite the cooling economy.
The assessment of the real economy has deteriorated significantly. The January statement was cautiously optimistic, citing "firmer growth" and "stabilization" in housing. The March statement replaces this with "mixed" indicators and describes the housing sector as undergoing an "ongoing adjustment." The use of the word "Nevertheless" before the growth projection suggests that the Committee now views the moderate expansion as a result of momentum rather than current strength.
The guidance has shifted from explicitly hawkish to ambiguously data-dependent. The January statement specifically mentioned the "extent and timing of any additional firming," which signaled that the Committee was still thinking about raising rates. The March statement replaces this with "Future policy adjustments," a neutral term that does not specify direction. This suggests the Committee is "keeping its options open" as the housing crisis begins to weigh on the outlook.
Overall Tone: Neutral / Conflicted
The Committee has shifted in two opposite directions simultaneously, resulting in a "tug-of-war" statement. On the inflation front, the tone is more Hawkish, as the Fed expresses deeper concern that inflation is not moderating. However, on the growth and housing front, the tone is significantly more Dovish, acknowledging that the housing market is still falling and economic data is mixed.
The most critical signal is the removal of the phrase "additional firming." By deleting the explicit reference to future rate hikes, the Committee has effectively paused its tightening cycle. The shift is Neutral in aggregate, but it reveals a growing anxiety: the Fed is trapped between a housing market that is failing and an inflation rate that refuses to drop.