As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from August 11, 2009, and September 22, 2009. This period is critical as it marks the transition from "stabilizing the freefall" to "managing the recovery" during the Great Recession.
Information received since the Federal Open Market Committee met in ~~June~~ August suggests that economic activity ~~is leveling out~~ has picked up following its severe downturn. Conditions in financial markets have improved further~~,~~ and activity in the housing sector has increased. Household spending ~~has continued to show signs of~~ seems to be stabilizing~~,~~ but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing~~,~~ though at a slower pace; they ~~are making~~ continue to make 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~~ anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will ~~contribute to a gradual resumption of sustainable~~ support a strengthening of economic growth and a gradual return to higher levels of resource utilization ~~in a context of price stability~~. in a context of price stability.
~~The prices of energy and other commodities have risen of late. However,~~ With substantial resource slack ~~is likely to~~ likely to continue to dampen cost pressures~~,~~ and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.
In these circumstances, the Federal Reserve will ~~employ all available~~ continue to employ a wide range of 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 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 gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. 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 |
|---|---|---|
| "is leveling out" | "has picked up following its severe downturn" | Shift from a "bottoming out" phase to an active (though fragile) recovery. |
| "contribute to a gradual resumption" | "support a strengthening... return to higher resource utilization" | More assertive language regarding the goal of returning to full employment. |
| "Prices of energy... have risen" | "longer-term inflation expectations stable" | Pivot from worrying about headline volatility to focusing on anchored inflation expectations. |
| "up to $1.25 trillion... by end of year" | "$1.25 trillion... by end of first quarter of 2010" | Extension of the QE timeline; signals a longer duration of balance sheet support. |
The Committee has moved from a reactive stance regarding commodity price volatility ("prices of energy... have risen of late") to a structural assessment of inflation. By adding the phrase "longer-term inflation expectations stable," the Fed is signaling that it is not worried about a wage-price spiral despite the stimulus, nor is it worried about a deflationary collapse. The focus is now firmly on "resource slack" as the primary anchor keeping inflation subdued.
There is a noticeable upgrade in the assessment of the real economy. The shift from "leveling out" to "picked up" is a significant qualitative upgrade. Furthermore, the mention that business cutbacks are occurring "at a slower pace" suggests the Committee sees the bleeding stopping in the private sector. The goal has shifted from mere "stabilization" to a "return to higher levels of resource utilization" (central bank code for reducing unemployment).
The guidance on the federal funds rate remains unchanged ("exceptionally low... for an extended period"), maintaining a strong dovish anchor. However, the guidance on Quantitative Easing (QE) has shifted. By extending the window for agency MBS/debt purchases into Q1 2010, the Fed is signaling that the recovery is not yet self-sustaining and requires a longer runway of liquidity support than previously anticipated.
Verdict: Dovish / Accommodative
While the economic data described is slightly more positive (shifting from "leveling out" to "picked up"), the policy response is more dovish. The Committee extended the timeline for its asset purchases (QE) into 2010, signaling that they are not ready to taper support despite the modest improvement in activity. The removal of concerns regarding energy prices and the explicit mention of "stable inflation expectations" provides the Committee with the "inflationary headroom" to keep rates at zero and the balance sheet expanding for a longer duration. In short: the economy is improving, but the Fed is responding by ensuring the stimulus lasts even longer to prevent a double-dip recession.