As a senior economist and central bank strategist, I have analyzed the two provided documents. It is critical to first note a structural distinction: the "Previous Statement" (March 10) was a Liquidity/Operational Announcement focused on market plumbing (TSLF and Swap Lines), whereas the "Current Statement" (March 18) is a Formal Policy Statement regarding the federal funds rate.
Because these are different types of communications, the "redline" represents a total pivot from operational liquidity support to macroeconomic policy steering.
~~Since the coordinated actions taken in December 2007, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in funding markets. Pressures in some of these markets have recently increased again. We all continue to work together and will take appropriate steps to address those liquidity pressures.~~ ~~To that end, today the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing specific measures.~~
The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.
~~Federal Reserve ActionsThe Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the case with the current securities lending program, securities will be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008. The Federal Reserve will consult with primary dealers on technical design features of the TSLF.~~
~~In addition, the Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30, 2008.~~
~~The actions announced today supplement the measures announced by the Federal Reserve on Friday to boost the size of the Term Auction Facility to $100 billion and to undertake a series of term repurchase transactions that will cumulate to $100 billion.~~
Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.
Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.
Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.
~~Information on Related Actions Being Taken by Other Central BanksInformation on the actions that will be taken by other central banks is available at the following websites: Bank of Canada Bank of England European Central Bank Swiss National Bank (61 KB PDF) Statements by Other Central BanksBank of Japan Sveriges Riksbank Term Securities Lending FacilityTerms and conditionsFrequently asked questions~~
In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 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, and San Francisco.
| Removed | Added | Significance |
|---|---|---|
| Specifics on TSLF, Swap Lines, and G-10 coordination. | 75bps cut to Fed Funds Rate and Discount Rate. | Shift from "plumbing" (liquidity) to "price" (interest rates) to fight recession. |
| Technical details on collateral and auction dates. | Analysis of consumer spending, labor markets, and housing contraction. | Explicit acknowledgment of a deteriorating real economy. |
| References to other central bank websites. | Discussion of elevated inflation and "uncertainty" in the outlook. | Introduction of the "inflation vs. growth" trade-off. |
Inflation
The previous statement ignored inflation entirely, focusing on liquidity. The current statement introduces a complex narrative: inflation is "elevated" and expectations have "risen," yet the Committee expects it to "moderate." This indicates the Fed is fighting a "stagflationary" impulse—trying to cut rates to save growth while worrying that energy prices are keeping inflation high.
Labor Markets & Growth
The shift here is stark. The March 10 statement viewed the problem as "liquidity pressures in funding markets" (a financial crisis). The March 18 statement views the problem as a systemic economic decline: "economic activity has weakened further," "consumer spending has slowed," and "labor markets have softened." The crisis has moved from Wall Street to Main Street.
Forward Guidance
The guidance has shifted from operational (announcing auction dates for the TSLF) to discretionary and data-dependent. The phrase "The Committee will act in a timely manner as needed" is a classic signal that more rate cuts are on the table if the downside risks to growth materialize.
The Committee has shifted aggressively Dovish.
While the text contains "hawkish" caveats regarding elevated inflation, the actual policy action—a massive 75-basis-point cut—and the admission that labor markets are softening and the housing contraction is deepening, signal a pivot toward emergency growth support. The presence of two dissenting votes (Fisher and Plosser) who preferred "less aggressive action" further confirms that the majority of the Committee has moved into a highly accommodative stance to prevent a systemic economic collapse.