As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from December 15, 2009, and January 27, 2010. This period is critical as it captures the transition from the acute crisis phase to the early, fragile stages of the recovery.
Information received since the Federal Open Market Committee met in ~~November~~ December suggests that economic activity has continued to ~~pick up~~ strengthen and that the deterioration in the labor market is abating. ~~The housing sector has shown some signs of improvement over recent months.~~ Household spending ~~appears to be expanding~~ is expanding at a moderate rate~~, though it~~ but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. ~~Businesses are still cutting back on fixed investment, 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.~~ Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls. Firms have brought inventory stocks into better alignment with sales. ~~Financial market conditions have become more supportive of economic growth.~~ While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although ~~economic activity is likely to remain weak~~ the pace of economic recovery is likely to be moderate for a time, the Committee anticipates ~~that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will 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~~ continuing to restrain cost pressures and with longer-term inflation expectations stable, ~~the Committee expects that~~ inflation ~~will remain~~ is likely to be subdued for some time.
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 is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it 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.
In light of ~~ongoing improvements in the~~ improved 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 Federal Reserve will be closing 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 on February 1, ~~2010,~~ as previously announced. ~~The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1.~~ In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve ~~expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010~~ is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit will be offered at the final auction on March 8. 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; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; ~~Kevin M. Warsh;~~ and Kevin M. Warsh. ~~Janet L. Yellen.~~ Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.
| Removed | Added | Significance |
|---|---|---|
| "pick up" / "remain weak" | "strengthen" / "recovery... moderate" | Shift from describing a "stop in decline" to describing an actual "recovery." |
| "likely to continue to dampen" | "continuing to restrain" | Shift from a forecast of future slack to an observation of current slack. |
| General list of stimulus tools | Specific TAF auction dates/amounts | Transition from broad policy intent to concrete execution of the exit strategy. |
| Unanimous vote | Dissent by Thomas Hoenig | First signal of internal division regarding the "extended period" of low rates. |
The Committee remains firmly in a "deflationary concern" mindset. However, there is a subtle linguistic shift from "expects that inflation will remain subdued" to "inflation is likely to be subdued." This moves the statement from a projection to a statement of probability based on current evidence. The focus remains on "resource slack" as the primary driver of low cost pressures.
There is a noticeable upgrade in the growth narrative. The phrase "continued to pick up" (Dec) is upgraded to "continued to strengthen" (Jan). Crucially, the Committee replaces the phrase "economic activity is likely to remain weak" with "the pace of economic recovery is likely to be moderate." This is a pivotal shift: the Fed is no longer describing a stagnant economy, but a recovering one, albeit a slow one. However, the labor market remains the "anchor" dragging on the recovery, with the phrase "reluctant to add to payrolls" remaining unchanged.
The core forward guidance regarding the federal funds rate ("exceptionally low levels... for an extended period") remains untouched in the main text. However, the Voting Record introduces a critical new element: the first formal dissent. Thomas Hoenig’s dissent explicitly challenges the "extended period" guidance, signaling that the "Hawkish" wing of the committee believes the recovery is sufficient to begin contemplating a normalization of rates.
The overall tone of the statement is Mildly Hawkish.
While the policy action (rates and QE) remained unchanged, the narrative shifted from "stabilization" to "recovery." By upgrading the description of economic activity from "picking up" to "strengthening" and changing "remain weak" to "moderate recovery," the Fed is acknowledging a positive trajectory. Most importantly, the inclusion of Thomas Hoenig's dissent provides a public signal that the consensus on "exceptionally low rates for an extended period" is beginning to fray. The transition from vague timelines to specific dates for the closure of liquidity facilities further indicates a move toward normalizing the Federal Reserve's balance sheet.