As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from November 4 and December 15, 2009. This period is critical as it represents the transition from the acute "crisis management" phase of the Great Recession toward a managed recovery.
Information received since the Federal Open Market Committee met in ~~September~~ November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. ~~Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period.~~ The ~~Activity in the~~ housing sector has ~~increased~~ shown some signs of improvement over recent months. Household spending appears to be expanding at a moderate rate, ~~but~~ though it remains constrained by ~~ongoing job losses~~ a weak labor market, ~~sluggish~~ modest income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment ~~and staffing~~, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales. Financial market conditions have become more supportive of economic growth. 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~~ contribute to 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~~ is in the process of purchasing a total of $1.25 trillion of agency mortgage-backed securities and 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.~~ In order to promote a smooth transition in markets, the Committee ~~will gradually slow~~ is gradually slowing the pace of ~~its~~ these 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.~~
In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
| Removed | Added | Significance |
|---|---|---|
| "Ongoing job losses" / "Sluggish income growth" | "Deterioration in labor market is abating" / "Modest income growth" | Shift from describing a free-fall to describing a stabilization/bottoming-out process. |
| "Conditions... roughly unchanged" | "Financial market conditions have become more supportive" | Explicit acknowledgement that the financial "plumbing" is repairing. |
| "Will purchase" / "Will gradually slow" | "Is in the process of purchasing" / "Is gradually slowing" | Shift from intent to execution; signals the QE1 program is nearing completion. |
| General balance sheet monitoring | Detailed list of expiring liquidity facilities (CPFF, TSLF, etc.) | Transition from emergency crisis lending to a planned "exit" from extraordinary liquidity. |
Neutral. The language regarding inflation is identical across both statements. The Committee remains concerned that "substantial resource slack" will keep inflation "subdued." There is no shift toward hawkishness here; the Fed is still firmly in a "low-inflation/low-growth" mindset.
Cautiously Optimistic. This is the most significant thematic shift. The previous statement focused on the constraints (job losses, sluggish growth). The current statement introduces the phrase "deterioration in the labor market is abating." While it notes that businesses "remain reluctant to add to payrolls," the shift from "job losses" to "abating deterioration" is a classic central bank linguistic signal that the economy has found a floor.
Normalization of the Balance Sheet. While the federal funds rate guidance remains "exceptionally low... for an extended period" (unchanged), the guidance on the balance sheet has shifted. The Fed has moved from general promises of support to a specific, dated schedule for the expiration of emergency liquidity facilities (Feb 1, 2010). This signals a move toward "normalization" of the Fed's role as lender of last resort.
The Committee has shifted Mildly Hawkish (or more accurately, "Normalization-leaning").
While the interest rate guidance remains deeply dovish, the overall tone has shifted away from "crisis mode." By upgrading the description of the labor market (from "job losses" to "abating deterioration") and providing a concrete timeline for the expiration of emergency liquidity facilities, the Fed is signaling that the worst of the financial panic is over. The transition from "will purchase" to "is in the process of purchasing" further indicates that the primary stimulus phase (QE1) is winding down. The Fed is not raising rates, but it is beginning to "take the training wheels off" the financial system.