As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from April 29 and June 24, 2009. This period represents a critical juncture in the Great Recession, where the Committee was balancing the need for aggressive stimulus against emerging signs of stabilization.
Information received since the Federal Open Market Committee met in ~~March~~ April ~~indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower~~ suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown ~~signs~~ further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. ~~Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing.~~ Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although ~~the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions,~~ economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.
~~In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. 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.~~ The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery 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~~ continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve ~~is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor~~ is monitoring the size and composition of ~~the Federal Reserve's~~ its balance sheet ~~in light of financial and economic developments~~ and will make adjustments to its credit and liquidity programs as warranted.
| Removed | Added | Significance |
|---|---|---|
| "Economy has continued to contract" | "Pace of economic contraction is slowing" | Shift from describing a continuing decline to describing a decelerating decline (inflection point). |
| "Weak sales prospects... led businesses to cut back on inventories" | "Making progress in bringing inventory stocks into better alignment" | Signal that the "inventory overhang" is clearing, a prerequisite for production recovery. |
| Risk of inflation persisting below target rates | "Prices of energy and other commodities have risen" | Shift from fearing deflation/under-shooting to acknowledging nominal price pressures. |
| "Facilitating the extension of credit... through liquidity programs" | "Will make adjustments to its credit and liquidity programs as warranted" | Transition from "emergency deployment" mode to "active management/adjustment" mode. |
There is a notable shift in the inflation narrative. In April, the Committee was concerned with the downside risk (inflation remaining too low). By June, they acknowledge a rise in commodity and energy prices. However, they maintain a dovish stance by arguing that "substantial resource slack" (high unemployment/idle capacity) will prevent these commodity price spikes from triggering a broader inflationary spiral.
The tone regarding growth has shifted from "continued contraction" to a "slowing pace of contraction." While the Committee admits that job losses and tight credit still constrain households, the specific mention of inventory alignment is a bullish signal for economists; it suggests that the "destocking" phase of the recession is ending, which typically precedes a return to growth.
The forward guidance remains steadfastly accommodative. The change from "anticipates" to "continues to anticipate" exceptionally low rates for an extended period is a subtle but important reinforcement. It signals to the markets that despite the "slowing contraction" and "improved financial conditions," the Fed is not yet ready to discuss a pivot toward tightening.
The Committee has remained Neutral to slightly Dovish. While the economic data is marginally improving (slowing contraction, better inventory alignment), the Fed has not used this as a reason to signal a reduction in stimulus. Instead, they reinforced their commitment to "exceptionally low" rates and shifted their language on liquidity programs to allow for "adjustments as warranted." The acknowledgment of rising commodity prices is a hawkish data point, but it is immediately neutralized by the reference to "substantial resource slack." Overall, the Fed is signaling that while the bottom may be in, the recovery is too fragile to warrant any change in the aggressive policy stance.