As a senior economist and central bank strategist, I have conducted a comparative analysis of the FOMC statements from May 9 and June 28, 2007. This period is critical as it captures the Committee's attempt to balance a slowing economy with persistent inflationary pressures during the early stages of the housing market correction.
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
~~Economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing.~~ Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to ~~expand~~ continue to expand at a moderate pace over coming quarters.
~~Core inflation remains somewhat elevated. Although inflation pressures seem likely to moderate over time,~~ Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. ~~the~~ Moreover, 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 |
|---|---|---|
| "Economic growth slowed..." | "Economic growth appears to have been moderate..." | Growth Re-characterization: Shifts from a narrative of deceleration ("slowed") to one of stability ("moderate"). |
| "Core inflation remains somewhat elevated." | "Readings on core inflation have improved modestly..." | Data Acknowledgement: Admits to a slight downward trend in inflation data. |
| "Inflation pressures seem likely to moderate over time" | "Sustained moderation... has yet to be convincingly demonstrated." | Increased Skepticism: Moves from an assumption of future moderation to a demand for empirical proof. |
| "Although" | "Moreover" | Logical Pivot: Changes the relationship between inflation trends and resource utilization from a contrast to a reinforcement. |
Inflation
The Committee has moved from a general assumption that inflation would "likely moderate over time" to a more cautious, evidence-based stance. While they acknowledge "modest" improvements in core inflation readings, the language has become more stringent. The phrase "yet to be convincingly demonstrated" suggests the FOMC is raising the bar for what it considers a successful disinflationary trend.
Labor Markets & Growth
There is a subtle but important upgrade in the growth narrative. In May, the Committee noted that growth had "slowed." By June, they describe it as "moderate." By framing the growth as moderate despite the housing sector adjustment, the Committee is signaling that the broader economy is more resilient to the subprime shock than previously feared.
Forward Guidance
The forward guidance remains virtually identical. The "predominant policy concern" is still inflation, and the Committee maintains its data-dependent posture. There is no signal of an imminent pivot toward easing; rather, the insistence on "convincing" evidence of moderation suggests the funds rate will remain "higher for longer" (in 2007 terms).
Verdict: Slightly Hawkish
While the Committee acknowledges modest improvements in inflation, the overall tone has shifted toward a more skeptical and cautious posture. By removing the optimistic projection that inflation pressures "seem likely to moderate" and replacing it with the requirement that such moderation be "convincingly demonstrated," the FOMC is signaling a reluctance to cut rates prematurely. Furthermore, the upgrade of growth from "slowed" to "moderate" removes a primary justification for easing. The Committee is effectively telling the markets: Growth is holding up, and we aren't convinced inflation is gone yet.