As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from September 22, 2009, and November 4, 2009. This period represents the height of the Great Recession recovery efforts, characterized by "Quantitative Easing" (QE) and the management of the Zero Lower Bound (ZLB).
Information received since the Federal Open Market Committee met in ~~August~~ September suggests that economic activity ~~has picked up following its severe downturn~~ has continued to pick up. Conditions in financial markets ~~have improved further~~ were roughly unchanged, on balance, over the intermeeting period, and activity in the housing sector has increased over recent months. Household spending ~~seems to be stabilizing~~ appears to be expanding, 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 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 anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack 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 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~~, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations,~~ are likely to warrant exceptionally low levels of the federal funds rate for an extended period. 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 $1.25 trillion of agency mortgage-backed securities and ~~up to $200 billion~~ about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. ~~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.~~ In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010. 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 |
|---|---|---|
| "picked up following its severe downturn" | "continued to pick up" | Shifts from acknowledging the crash to confirming a trend of recovery. |
| "improved further" (Financial Markets) | "roughly unchanged, on balance" | Signals a plateau in the rapid improvement of financial conditions. |
| "seems to be stabilizing" (Spending) | "appears to be expanding" | A qualitative upgrade in the assessment of consumer demand. |
| "up to $200 billion" (Agency Debt) | "about $175 billion" | A technical adjustment downward due to lack of available supply. |
| Treasury purchase mention | (Removed) | The $300bn Treasury program concluded; removed as it is no longer active. |
| General "economic conditions" | "including low rates of resource utilization, subdued inflation..." | Crucial: Explicitly defines the "why" behind the low rates (data-dependency). |
The characterization of inflation remains static. The Committee continues to view inflation as "subdued" due to "substantial resource slack." However, the current statement elevates this from a general observation to a formal justification for maintaining the federal funds rate at the zero lower bound.
There is a noticeable positive shift in the growth narrative. The transition from spending that "seems to be stabilizing" to spending that "appears to be expanding" suggests the Fed is seeing the first signs of a self-sustaining recovery. However, the persistence of "ongoing job losses" indicates that the labor market remains the primary drag on the economy.
The Committee has significantly strengthened its forward guidance. By explicitly listing "low rates of resource utilization" and "subdued inflation trends" as the triggers for keeping rates low, the Fed is providing the market with a roadmap. They are signaling that rates will not rise simply because of a calendar date, but only once specific macroeconomic thresholds (employment and inflation) are met.
The Committee has shifted Dovish.
While the economic assessment is slightly more optimistic (spending is "expanding"), the policy stance has become more entrenched. The addition of specific criteria (resource utilization and inflation trends) to the forward guidance serves to "lock in" low rates for a longer duration, reducing the probability of a premature hike. Furthermore, the admission that financial markets are "roughly unchanged" suggests that the Fed believes the heavy lifting of monetary stimulus is still required to ensure the recovery takes hold.