As a senior economist and strategist, I have analyzed the transition between the April 30 and June 25, 2008, FOMC statements. This period is critical as it captures the Committee's struggle to balance a deteriorating housing market against a spike in commodity-driven inflation.
The Federal Open Market Committee decided today to ~~lower its target for the federal funds rate 25 basis points to~~ keep its target for the federal funds rate at 2 percent.
Recent information indicates that ~~economic activity remains weak~~ overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. ~~, and~~ Tight credit conditions, ~~and the deepening~~ the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.
~~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~~ later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high. ~~It will be necessary to continue to monitor inflation developments carefully.~~
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 risks to economic activity~~. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will 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; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against ~~were Richard W. Fisher and Charles I. Plosser, who preferred no change in the target for the federal funds rate at this meeting~~ was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.
~~In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 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 New York, Cleveland, Atlanta, and San Francisco.~~
| Removed | Added | Significance |
|---|---|---|
| "lower... 25 basis points" | "keep... at 2 percent" | Shift from active easing to a pause (hold). |
| "economic activity remains weak" | "overall economic activity continues to expand" | Significant upgrade in the assessment of GDP/Growth. |
| "deepening housing contraction" | "ongoing housing contraction" | Slight softening of the housing alarm, though still negative. |
| "readings on core inflation have improved" | "upside risks to inflation... have increased" | Pivot from focusing on core improvement to fearing headline/expectations. |
| "mitigate risks to economic activity" | "downside risks... appear to have diminished" | Explicit signal that the recessionary threat is perceived as lower. |
| Plosser (Voting against) | Plosser (Voting for) | Internal shift; a hawk now accepts the current rate as sufficient. |
Inflation
The Committee has shifted from a cautious optimism that core inflation was "improving" to a heightened state of alarm regarding headline inflation. The removal of the phrase "reflecting a projected leveling-out of energy prices" suggests the Fed was surprised by the persistence of the oil spike. The explicit mention of "upside risks to inflation and inflation expectations" indicates that inflation is now a primary constraint on further rate cuts.
Labor Markets & Growth
There is a striking contradiction in the text. While the Committee admits labor markets have "softened further," they have upgraded the overall economic assessment from "weak" to "continues to expand." The mention of "firming in household spending" suggests the Fed believed the economy had found a floor, reducing the urgency for aggressive stimulus.
Forward Guidance
The guidance has shifted from "mitigating risks" to a "balanced risk" framework. By stating that downside risks to growth have "diminished" while upside risks to inflation have "increased," the Fed is signaling a "wait-and-see" approach. The data-dependency is now skewed toward inflation prints rather than growth prints.
The Committee has shifted decisively Hawkish.
While the federal funds rate remained unchanged (a neutral action), the surrounding rhetoric is significantly more restrictive. The Fed upgraded its view of economic growth, downgraded its fear of a collapse ("risks... diminished"), and explicitly highlighted the rising threat of inflation. Most tellingly, the internal voting dynamics shifted: Charles Plosser moved from opposing a cut to supporting the hold, and Richard Fisher moved from wanting "no change" to wanting a "rate increase." The narrative has moved from "fighting a slowdown" to "preventing an inflation overshoot."