As a senior economist and strategist, I have conducted a comparative analysis of the FOMC statements from March 21, 2007, and May 9, 2007. While the federal funds rate remained unchanged, the subtle shifts in the descriptive language regarding economic growth are highly significant.
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
~~Recent indicators have been mixed~~ Economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to ~~continue to~~ expand at a moderate pace over coming quarters.
~~Recent readings on~~ Core inflation remains somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.
In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. 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; 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 |
|---|---|---|
| "Recent indicators have been mixed" | "Economic growth slowed in the first part of this year" | High. Shifts from vague ambiguity ("mixed") to an explicit admission of deceleration. |
| "continue to" | (Removed) | Low/Moderate. Subtle change in the growth outlook; removes the assumption of a steady trend. |
| "Recent readings on" | "Core inflation remains" | Moderate. Shifts from discussing specific "readings" (data points) to a state of being ("remains"), suggesting a more persistent trend. |
Inflation
The shift from "Recent readings... have been somewhat elevated" to "Core inflation remains somewhat elevated" is a subtle but important linguistic hardening. By removing the reference to "readings," the Committee is no longer just commenting on the latest data prints, but is instead characterizing the state of inflation. This suggests that the Committee views the elevated inflation as a persistent feature rather than a series of volatile data points.
Labor Markets & Growth
This is the most critical area of divergence. In March, the Committee used the phrase "indicators have been mixed," which provided a neutral hedge. By May, they explicitly stated that "Economic growth slowed." This is a formal acknowledgment of a downward trend in GDP/activity. However, they maintain the "moderate pace" projection for the future, suggesting they view the slowdown as a temporary dip rather than a systemic collapse (a classic "soft landing" narrative).
Forward Guidance
The forward guidance remains identical. The Committee continues to emphasize a dual-mandate dependency ("inflation and economic growth") and maintains that inflation is the "predominant policy concern." This indicates that despite the acknowledged slowdown in growth, the Committee is not yet ready to signal a pivot toward rate cuts.
Tonal Shift: Neutral to Slightly Dovish (Growth) / Hawkish (Inflation)
The overall tone is Neutral, but it contains a conflicting internal tension. The admission that "economic growth slowed" is a Dovish signal, as it acknowledges weakness that typically justifies lower rates. However, the Committee countered this by hardening the language around inflation ("remains elevated") and keeping the "predominant policy concern" focused on inflation.
Strategist's Conclusion: The Committee is attempting to "walk a tightrope." They are acknowledging the slowing economy to maintain credibility with the markets, but they are explicitly refusing to let that slowdown trigger a rate cut because they remain terrified of persistent inflation.