As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from October 7 and October 29, 2008. This period represents the height of the Global Financial Crisis, and the shift in language reflects a transition from "coordinated global response" to a "deepening domestic recession."
~~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.~~
The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent. ~~The Federal Open Market Committee 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.~~
The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. ~~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. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability. ~~Inflation has been high, 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.~~
Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. 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; 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.
In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-1/4 percent. ~~1-3/4 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, Cleveland, and San Francisco. ~~request submitted by the Board of Directors of the Federal Reserve Bank of Boston.~~
~~Information on Actions Taken by Other Central Banks... [Removed]~~
~~Statements by Other Central Banks... [Removed]~~
| Removed | Added | Significance |
|---|---|---|
| Joint Statement/Global Coordination preamble | Specific domestic data (Consumer spending, Industrial production, Exports) | Shift from a "global systemic" focus to a "domestic recessionary" focus. |
| "Inflation has been high" | "Expects inflation to moderate... to levels consistent with price stability" | Transition from fighting inflation to anticipating deflationary pressure. |
| General "weakening of economic activity" | Specifics on business equipment and foreign economy damping | Acknowledgment that the slowdown is broadening across all sectors. |
| Single Bank (Boston) discount rate request | Multiple Banks (NY, Cleveland, SF) requests | Indicates widespread liquidity stress across multiple regional Fed districts. |
There is a critical pivot here. In the Oct 7 statement, the Fed was still acknowledging that "Inflation has been high," treating the decline in commodity prices as a helpful offset to "upside risks." By Oct 29, the language has shifted to a forward-looking expectation that inflation will "moderate... to levels consistent with price stability." This is a subtle but important signal that the Committee is no longer worried about inflation overshooting, but is now concerned about the pace of its decline.
The characterization of growth has shifted from "suggesting" a slowdown to "appearing" to have slowed markedly. More importantly, the Fed has moved from generalities to specific vulnerabilities: consumer expenditures, business equipment spending, and exports. This indicates that the crisis had moved from the financial plumbing (banks) into the "real economy" (households and firms).
The Oct 7 statement relied heavily on the "Joint Action" of global central banks as the primary signal of support. The Oct 29 statement shifts the guidance toward a broader toolkit: "extraordinary liquidity measures" and "official steps to strengthen financial systems." The phrase "downside risks to growth remain" serves as a "door-opener" for further rate cuts in future meetings.
The Committee shifted decisively Dovish.
While both statements resulted in 50bps cuts, the Oct 29 statement is significantly more concerned. The removal of the "Joint Statement" framework suggests the Fed is now operating in an emergency domestic mode. By explicitly listing the collapse in consumer spending and industrial production, and by expanding the discount rate reductions to four regional banks instead of one, the Fed is signaling that the economic deterioration is accelerating and broadening. The shift from "inflation has been high" to "expects inflation to moderate" removes the final theoretical barrier to aggressive monetary easing.