As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from March 18, 2008, and April 30, 2008. This period represents a critical juncture in the early stages of the Global Financial Crisis.
The Federal Open Market Committee decided today to lower its target for the federal funds rate ~~75 basis points to 2-1/4 percent~~ 25 basis points to 2 percent.
Recent information indicates that ~~the outlook for~~ economic activity ~~has weakened further~~ remains weak. ~~Growth in consumer spending has slowed~~ Household and business spending has been subdued and labor markets have softened ~~.~~ further. Financial markets remain under considerable stress, and ~~the tightening of~~ tight 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.~~ Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. 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~~ remains high. It will be necessary to continue to monitor inflation developments carefully.
~~Today’s policy action, combined with those taken earlier,~~ The substantial easing of monetary policy to date, combined with ongoing 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~~ continue to monitor economic and financial developments and will act 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~~ no change in the target for the federal funds rate at this meeting.
In a related action, the Board of Governors unanimously approved a ~~75-basis-point~~ 25-basis-point decrease in the discount rate to ~~2-1/2 percent~~ 2-1/4 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, ~~and~~ Cleveland, Atlanta, and San Francisco.
| Removed | Added | Significance |
|---|---|---|
| "Outlook... has weakened further" | "Economic activity remains weak" | Shift from a trajectory of decline to a state of weakness. |
| "Growth in consumer spending has slowed" | "Household and business spending has been subdued" | Broadens the scope of weakness to include the corporate sector. |
| "Inflation has been elevated" | "Core inflation have improved somewhat" | Nuanced view: Core is cooling, but headline/commodities remain a threat. |
| "Act in a timely manner" | "Continue to monitor... and act as needed" | Shift from proactive urgency to a more observational, data-dependent stance. |
| "Less aggressive action" | "No change in the target" | The dissenters have moved from wanting a smaller cut to wanting no cut at all. |
Inflation
The Committee has moved from a general statement that inflation was "elevated" to a more granular distinction between core inflation (which is improving) and commodity prices (which are increasing). This suggests the Fed is recognizing a "bifurcated" inflation environment where underlying demand is falling, but supply-side shocks (energy) are keeping headline numbers high. The change from "uncertainty... has increased" to "remains high" suggests the shock has been absorbed, but the risk is now a persistent baseline.
Labor Markets & Growth
There is a clear deterioration in the assessment of the real economy. In March, the "outlook" was weakening; by April, activity "remains weak." Most critically, labor markets have moved from having "softened" to having "softened further." The inclusion of "business spending" alongside household spending indicates the Committee now sees a broader systemic contraction rather than just a consumer-led slowdown.
Forward Guidance
The guidance has shifted from a tone of urgent intervention ("act in a timely manner") to one of sustained support ("substantial easing... to date"). By emphasizing the cumulative effect of their actions, the Committee is signaling that they believe the "heavy lifting" of the initial emergency response is transitioning into a phase of monitoring and incremental adjustments.
The Committee has shifted Dovish, though the magnitude of the rate cut decreased (from 75bps to 25bps). While the actual policy move was smaller, the rhetoric regarding the economy grew significantly more pessimistic. The transition from "weakening" to "remains weak" and the admission that labor markets are softening "further" indicate a deepening concern for a recession. The Fed is effectively signaling that while they are slowing the pace of cuts, they are doing so because the economy is entering a sustained period of weakness that will require a prolonged accommodative stance.