As a senior economist and strategist, I have analyzed the transition from the September 16, 2008, statement to the October 7, 2008, joint action. This period represents a critical pivot in the Global Financial Crisis, moving from domestic observation to coordinated international intervention.
Joint Statement by Central Banks
Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.
Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.
Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.
Federal Reserve Actions
The Federal Open Market Committee ~~decided today to keep its target for the federal funds rate at 2 percent~~ has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.
~~Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.~~ Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.
Inflation has been high, ~~spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.~~ but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.
~~The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee.~~ The Committee will monitor economic and financial developments carefully 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; ~~Christine M. Cumming;~~ Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. ~~Ms. Cumming voted as the alternate for Timothy F. Geithner.~~
In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-3/4 percent. In taking this action, the Board approved the request submitted by the Board of Directors of the Federal Reserve Bank of Boston.
Information on Actions Taken by Other Central Banks [and Statements by Other Central Banks]...
| Removed | Added | Significance |
|---|---|---|
| "Keep its target... at 2 percent" | "Lower its target... to 1-1/2 percent" | Shift from a hold to an aggressive 50bps cut. |
| "Inflation outlook remains highly uncertain" | "Reduced the upside risks to inflation" | Pivot from fearing inflation to acknowledging its collapse. |
| "Downside risks to growth and upside risks to inflation are both of significant concern" | "Intensification of financial market turmoil... likely to exert additional restraint" | The "balanced risk" view is gone; the focus is now exclusively on growth/stability. |
| Domestic-only focus | Joint Statement with 6 other Central Banks | Transition to global coordinated monetary easing. |
| General "softening" of spending | "Slowed markedly" / "Reducing ability... to obtain credit" | Escalation of the crisis description from "softening" to "marked" slowdown. |
Inflation
There is a profound shift in the inflation narrative. In September, the Committee was cautious, noting that inflation was "high" and the outlook "highly uncertain." By October, the tone has shifted to relief. The Committee now explicitly links the "marked decline in energy and other commodity prices" to a reduction in upside risks. Inflation is no longer a primary constraint on policy; it has become a justification for easing.
Labor Markets & Growth
The characterization of the economy has deteriorated. The September statement noted that growth "appears to have slowed." The October statement upgrades this to "slowed markedly." Furthermore, the mechanism of the slowdown has shifted from a "softening of household spending" to a systemic failure of the credit markets ("reducing the ability of households and businesses to obtain credit"), signaling a deeper structural crisis.
Forward Guidance
The guidance has shifted from "monitoring" to "action." While the closing sentence regarding monitoring developments remains, the addition of the joint international statement signals a new era of "unprecedented joint actions." The move to cut the discount rate in tandem with the federal funds rate indicates a comprehensive effort to provide liquidity across all levels of the banking system.
The Committee has shifted decisively Dovish.
The transition is marked by the abandonment of the "balanced risk" framework (where inflation was still a concern) in favor of an aggressive pursuit of economic stabilization. The move from a rate hold to a 50bps cut, the coordinated global action with other central banks, and the explicit admission that the financial crisis has "augmented the downside risks to growth" all point to a committee that is now in "crisis mode," prioritizing liquidity and growth over price stability.