As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from September 18, 2007, and October 31, 2007. This period is critical as it captures the early stages of the Global Financial Crisis and the Fed's attempt to balance systemic instability with inflationary pressures.
The Federal Open Market Committee decided today to lower its target for the federal funds rate ~~50 basis points to 4-3/4 percent~~ 25 basis points to 4-1/2 percent.
~~Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally.~~ Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. ~~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.~~ Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.
Readings on core inflation have improved modestly this year~~. However~~, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.
~~Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook.~~ The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will ~~continue to assess the effects of these and other developments~~ assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; ~~Thomas M. Hoenig;~~ Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric ~~L.~~ S. Rosengren; and Kevin M. Warsh. Voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting.
In a related action, the Board of Governors unanimously approved a ~~50-basis-point decrease in the discount rate to 5-1/4 percent~~ 25-basis-point decrease in the discount rate to 5 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~~ New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco.
| Removed | Added | Significance |
|---|---|---|
| 50 bps cut | 25 bps cut | Slowing the pace of easing; suggests a transition from "crisis mode" to "calibration mode." |
| "Tightening of credit conditions" | "Strains... have eased somewhat" | Acknowledgment of short-term stabilization in liquidity markets. |
| General uncertainty language | "Upside risks to inflation roughly balance downside risks to growth" | Crucial shift. The Fed is now explicitly weighing a "balanced risk" framework. |
| Unanimous vote | Dissent by Thomas Hoenig | Signals internal division regarding the necessity of further easing. |
| "Intended to help" | "Combined with... September [action], should help" | Framing the current cut as a cumulative effort rather than a standalone emergency measure. |
Inflation:
The characterization of inflation has shifted from a passive observation ("readings... have improved") to an active concern. The addition of "recent increases in energy and commodity prices" indicates that the Committee is now worried about cost-push inflation. This introduces a "ceiling" to how aggressively they can cut rates without risking price stability.
Labor Markets & Growth:
The Committee has moved from describing growth as "moderate" to "solid" for the third quarter, but this is tempered by a new, explicit warning that expansion "will likely slow in the near term." The focus has shifted from the potential to restrain growth to an expectation of slowing growth due to the housing correction.
Forward Guidance:
The guidance has become more constrained. While the September statement focused on the "uncertainty" of the outlook, the October statement introduces a "balanced risk" narrative. By stating that risks to inflation and growth "roughly balance," the Fed is signaling that it may be nearing the end of its easing cycle, as any further cuts could tip the balance toward inflation.
The Committee has shifted Hawkish relative to the previous statement.
While the Fed did lower rates again, the move was smaller (25bps vs 50bps), the language regarding inflation became significantly more urgent (citing energy and commodity prices), and the "balanced risk" phrasing serves as a signal to markets that the Fed is hesitant to cut aggressively. Furthermore, the transition from a unanimous decision to a dissenting vote (Hoenig) underscores a growing internal appetite for a more restrictive stance. The Fed is attempting to pivot from "emergency firefighting" to a "measured approach."