As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from June 28, 2007, and August 7, 2007. This period is critical as it captures the early signals of the subprime mortgage crisis and the subsequent tightening of global credit markets.
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
Economic growth ~~appears to have been~~ was moderate during the first half of ~~this~~ the year, ~~despite the ongoing adjustment in the housing sector~~. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. The economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.
Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.
Although the downside risks to growth have increased somewhat, 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; Eric Rosengren; and Kevin M. Warsh.
| Removed | Added | Significance |
|---|---|---|
| "appears to have been" | "was" | Shift from estimation to a definitive statement of past growth. |
| "despite the ongoing adjustment in the housing sector" | "Financial markets have been volatile... credit conditions have become tighter... housing correction is ongoing" | High. Explicit acknowledgment of systemic financial stress and credit contraction beyond just "housing." |
| (N/A) | "supported by solid growth in employment and incomes and a robust global economy" | Attempt to balance the negative credit news with positive fundamental drivers. |
| (N/A) | "Although the downside risks to growth have increased somewhat" | High. First formal admission that the risk profile has shifted toward a growth slowdown. |
| "evolution of the" | (N/A) | Minor linguistic streamlining. |
Inflation
The Committee’s stance on inflation remains entirely unchanged. The language regarding "sustained moderation" and "resource utilization" is identical. This indicates that despite emerging financial instability, the Fed's primary mandate focus remained anchored on the risk of inflation overshooting, preventing an immediate pivot to rate cuts.
Labor Markets & Growth
There is a significant shift in the characterization of growth. While the "moderate" pace is maintained, the Committee has moved from a general observation to a specific acknowledgment of financial fragility. The addition of "volatile" markets and "tighter" credit conditions signals that the Fed is now monitoring the plumbing of the financial system. To offset this alarm, they added specific mentions of "employment and incomes," suggesting they believe the real economy is still resilient enough to withstand the credit crunch.
Forward Guidance
The guidance remains data-dependent, but the "balance of risks" has shifted. By adding that "downside risks to growth have increased somewhat," the Committee is signaling to the market that the threshold for future rate cuts has lowered, even while they maintain that inflation is the "predominant" concern.
The Committee has shifted Mildly Dovish.
While the "predominant policy concern" remains inflation (a hawkish anchor), the introduction of language regarding "volatile" financial markets, "tighter" credit conditions, and "increased downside risks to growth" represents a clear pivot. The Fed is effectively "hedging" its position: it is not yet ready to cut rates, but it is signaling to the markets that it is now acutely aware of the deteriorating financial environment. This is a classic "pre-pivot" statement where the Committee acknowledges the storm while insisting the house is still standing.