As a senior economist and strategist, I have analyzed the transition from the August 16, 2007, "inter-meeting" communication to the September 18, 2007, formal policy statement.
This transition is critical as it marks the shift from monitoring a crisis to intervening in one.
The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent. ~~Financial market conditions have deteriorated, and~~ Economic growth was moderate during the first half of the year, but tighter credit conditions ~~and increased uncertainty~~ have the potential to intensify the housing correction and restrain economic growth ~~going forward~~ more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time. ~~In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably.~~ Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. ~~The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.~~ Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.
Voting ~~in favor of the policy announcement~~ for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; ~~Richard W. Fisher;~~ Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; ~~Michael H. Moskow;~~ William Poole; Eric Rosengren; and Kevin M. Warsh. In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 5-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, St. Louis, Minneapolis, Kansas City, and San Francisco.
| Removed | Added | Significance |
|---|---|---|
| "Downside risks... increased appreciably" | "Lower its target... 50 basis points" | Shift from acknowledging risk to taking aggressive corrective action. |
| General "deterioration" of markets | "Intensify the housing correction" | Explicit naming of the housing market as the primary transmission mechanism of the crisis. |
| General "monitoring" language | "Readings on core inflation have improved" | Introduction of inflation data to justify the rate cut (providing "room" to move). |
| "Prepared to act as needed" | "50-basis-point decrease in the discount rate" | Expansion of liquidity tools beyond the Fed Funds rate to the Discount Window. |
The Committee has shifted decisively Dovish.
While the August statement was a cautious acknowledgment of risk, the September statement is an active policy pivot. The shift is evidenced by the aggressive 50bps cut to the federal funds rate and the simultaneous cut to the discount rate. Furthermore, the explicit mention of the "housing correction" indicates that the FOMC has stopped treating the turmoil as a mere "disruption" and now views it as a systemic threat to the broader economy. The inclusion of "improved" inflation readings serves as the intellectual justification for this dovish pivot.