As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from October 31, 2007, and December 11, 2007. This period is critical as it captures the early acceleration of the Global Financial Crisis.
The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent.
~~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.~~ Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy ~~action taken in September~~ actions taken earlier, 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, but ~~recent increases in~~ elevated 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.
~~The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth.~~ Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to 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; and Kevin M. Warsh. Voting against was Eric S. Rosengren, who preferred ~~no change in the federal funds rate at this meeting~~ to lower the target for the federal funds rate by 50 basis points at this meeting.
In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 4-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis ~~and San Francisco~~.
| Removed | Added | Significance |
|---|---|---|
| "Economic growth was solid... strains... eased somewhat" | "Economic growth is slowing... strains... have increased" | Major Pivot: Shift from a "softening" narrative to an active deterioration of both the real economy and financial stability. |
| "Forestall some of the adverse effects" | "Softening in business and consumer spending" | Broadening Risk: The crisis is no longer just a "housing correction" or "market disruption"; it is now hitting the real economy (spending). |
| "Upside risks to inflation roughly balance downside risks to growth" | "Increased the uncertainty surrounding the outlook" | Loss of Equilibrium: The Fed has abandoned the "balanced risk" framework in favor of an "uncertainty" framework, signaling a loss of visibility. |
| Hoenig (Voting against/No change) | Rosengren (Voting against/50bps cut) | Shift in Dissent: The internal debate shifted from "don't cut" to "cut more," indicating a sharp increase in perceived urgency. |
Inflation
The characterization of inflation has shifted from a "renewed upward pressure" (suggesting a temporary spike) to "elevated" prices. While the Committee still acknowledges inflation risks, the removal of the sentence stating that inflation risks "roughly balance" growth risks is a critical signal. The Fed is no longer treating inflation as a primary counterweight to growth; it is now a secondary concern relative to systemic instability.
Labor Markets & Growth
There is a stark degradation in the growth narrative. In October, growth was "solid" and the slowdown was a "likelihood" for the "near term." By December, the Fed admits growth is slowing and explicitly cites "softening in business and consumer spending." This indicates the contagion has spread from the financial sector to the household and corporate sectors.
Forward Guidance
The guidance has shifted from a targeted attempt to "forestall" specific adverse effects to a broader, more cautious stance of managing "uncertainty." The language is less prescriptive and more reactive, emphasizing that they will "act as needed," which provides the Committee maximum flexibility to pivot to more aggressive easing.
The Committee has shifted decisively Dovish.
While the rate cut remained at 25 basis points, the surrounding text reveals a significant increase in alarm. The transition from "strains have eased" to "strains have increased," the admission that consumer spending is softening, and the removal of the "balanced risk" language all point to a Committee that is becoming increasingly worried about a recession. Most tellingly, the nature of the dissent shifted: the "hawk" (Hoenig) moved into the majority, and the new dissenter (Rosengren) argued for a larger cut. This indicates that the internal consensus has moved rapidly toward aggressive easing.