As a senior economist and strategist, I have analyzed the transition from the January 28, 2009, statement to the March 17, 2009, statement. This period represents a critical pivot during the Great Recession, moving from "monitoring" the decline to "aggressive intervention."
Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. ~~Information received since the Committee met in December suggests that the economy has weakened further.~~ Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. ~~Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending.~~ Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. ~~Furthermore, global demand appears to be slowing significantly.~~ U.S. exports have slumped as a number of major trading partners have also fallen into recession. ~~Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight.~~ Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth. ~~The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.~~
In light of increasing economic slack here and abroad, ~~In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack,~~ the Committee expects that inflation will ~~pressures will~~ remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery ~~the resumption of sustainable economic growth~~ and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. ~~The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.~~
~~The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level.~~ To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. ~~The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant.~~ Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. ~~The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets.~~
The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. ~~The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses.~~ The Committee will continue to carefully monitor ~~monitor carefully~~ the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments ~~and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.~~
| Removed | Added | Significance |
|---|---|---|
| "for some time" | "for an extended period" | Stronger commitment to the Zero Lower Bound (ZLB). |
| "prepared to purchase... if evolving circumstances indicate" | "decided to purchase up to $300 billion of longer-term Treasury securities" | Shift from contingent action to active Quantitative Easing (QE). |
| "will be implementing" (TALS) | "has launched... range of eligible collateral... likely to be expanded" | Transition from planning to execution and expansion of liquidity tools. |
| "downside risks... are significant" | "fiscal and monetary stimulus, will contribute to a gradual resumption" | Shift from highlighting risks to highlighting the solution/stimulus. |
| "declines in prices of energy/commodities" | "increasing economic slack here and abroad" | Broadens the deflationary narrative from commodity prices to systemic global slack. |
The Committee has moved from attributing subdued inflation to specific commodity price drops (energy/commodities) to a more systemic view of "economic slack here and abroad." The removal of the phrase "inflation pressures" in favor of simply "inflation" suggests a more direct concern about deflationary trends rather than just a lack of upward pressure.
The characterization of the economy has shifted from "weakened further" to "continues to contract." The language is now more explicit regarding the transmission mechanism of the crisis: specifically citing "declining equity and housing wealth" and "U.S. exports slumping" due to global recessions. There is a shift from a passive hope that recovery will "begin later this year" to an active belief that "policy actions... together with fiscal and monetary stimulus" will drive the recovery.
The most critical shift is in the duration of the policy stance. Changing "for some time" to "for an extended period" is a classic central bank signal intended to lower long-term interest rates by convincing markets that short-term rates will not rise for a significant duration. Furthermore, the guidance on balance sheet expansion moved from "standing ready" to specific, massive dollar amounts ($1.25 trillion in MBS, $300 billion in Treasuries).
The Committee shifted aggressively Dovish. While the target rate remained unchanged at 0-1/4%, the "action" within the statement was profoundly expansionary. The Fed transitioned from a posture of cautious monitoring and readiness to one of massive, quantified intervention. By committing to "an extended period" of low rates and announcing hundreds of billions in asset purchases (QE), the Committee signaled that the crisis was deeper than previously admitted and required an unprecedented scale of monetary stimulus to prevent a systemic collapse.