As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from June 24 and August 11, 2009. This period represents a critical phase of the Great Recession where the Committee was transitioning from "crisis management" to "recovery monitoring."
Information received since the Federal Open Market Committee met in ~~April~~ June suggests that ~~the pace of economic contraction is slowing~~ economic activity is leveling out. Conditions in financial markets have ~~generally improved in recent months~~ improved further in recent weeks. Household spending has ~~shown further~~ continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are ~~cutting back~~ still cutting back on fixed investment and staffing but ~~appear to be~~ making progress in bringing inventory stocks into better alignment with sales. Although 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.
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 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~~ is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. 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 monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.
| Removed | Added | Significance |
|---|---|---|
| "pace of economic contraction is slowing" | "economic activity is leveling out" | Major Shift: Moves from describing a slowing decline to a plateau. Suggests the trough of the recession has been reached. |
| "generally improved in recent months" | "improved further in recent weeks" | Acceleration: Shifts the timeframe from months to weeks, signaling a more immediate positive trend in financial markets. |
| (N/A) | "sluggish income growth" | New Risk: Explicitly identifies a new drag on the consumer, indicating that while spending is stabilizing, the underlying income engine is weak. |
| "will buy... by autumn" | "in the process of buying... gradually slow the pace... by end of October" | Operational Shift: Moves from a statement of intent to an execution phase, providing a specific exit date for the Treasury purchase program. |
Inflation
There is zero shift in the inflation narrative. The language regarding energy prices, "substantial resource slack," and the expectation that inflation will "remain subdued" is identical. This indicates the Committee remains entirely focused on growth and deflationary risks rather than price pressures.
Labor Markets & Growth
There is a subtle but important shift in the characterization of the economy. The move from "contraction is slowing" to "leveling out" is a bullish signal regarding the GDP trajectory. However, the addition of "sluggish income growth" and the qualifier "still cutting back" regarding business investment suggests that while the bottom may be in, the recovery is fragile and lacks momentum.
Forward Guidance
The guidance on the federal funds rate remains static ("exceptionally low... for an extended period"). The primary shift in guidance is operational. By specifying the "end of October" for Treasury purchases and announcing a "gradual slow [in] the pace," the Fed is attempting to manage market expectations to prevent a "taper tantrum" or liquidity shock as the program winds down.
The Committee has shifted Slightly Dovish to Neutral.
While the description of the economy "leveling out" is technically more positive (Hawkish) than "contraction slowing," the overall tone remains heavily accommodative. The addition of "sluggish income growth" as a constraint on households justifies the continued need for "exceptionally low" rates. Most importantly, the decision to "gradually slow" the Treasury purchases rather than abruptly stopping them demonstrates a cautious, supportive approach to market liquidity. The Fed is signaling that while the acute crisis phase is passing, the "patient" is still in critical condition and requires continued, steady support.