As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from January 27 and March 16, 2010. This period represents a critical phase of the "Great Recession" recovery, where the Committee was balancing the exit from emergency liquidity facilities with the need to maintain accommodative conditions.
Information received since the Federal Open Market Committee met in ~~December~~ January suggests that economic activity has continued to strengthen and that the ~~deterioration in the~~ labor market is ~~abating~~ stabilizing. Household spending is expanding at a moderate rate but remains constrained by ~~a weak labor market~~ high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software ~~appears to be picking up~~ has risen significantly. ~~But~~ However, investment in ~~structures is still contracting~~ nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. ~~Firms have brought inventory stocks into better alignment with sales.~~ While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack continuing to restrain cost pressures and ~~with~~ longer-term inflation expectations stable, inflation 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~~ has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. ~~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.~~ The Committee will continue to ~~evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets~~ monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
In light of improved functioning of financial markets, 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, as previously announced. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve 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~~ has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility ~~remain set~~ is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and ~~March 31~~ on March 31 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; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that ~~economic and financial conditions had changed sufficiently that the expectation~~ continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.
| Removed | Added | Significance |
|---|---|---|
| "deterioration... is abating" | "labor market is stabilizing" | Shift from describing a slowing decline to a plateau. |
| "appears to be picking up" | "has risen significantly" | Stronger conviction regarding business investment. |
| "structures is still contracting" | "nonresidential structures is declining; housing starts... flat" | More granular detail highlighting the continued weakness in housing. |
| Specific list of liquidity facilities | "has been closing the special liquidity facilities" | Transition from "active management" to "cleanup/winding down" phase. |
| "evaluate its purchases" | "employ its policy tools as necessary" | Broadens the Fed's stated mandate to use any tool available, not just QE. |
| Hoenig's general dissent | Hoenig's warning on "financial imbalances" | Explicitly introduces the risk of asset bubbles due to low rates. |
Inflation
The language regarding inflation remains virtually identical. The Committee continues to view inflation as "subdued" due to "substantial resource slack." There is no shift toward hawkishness here; the Fed remains convinced that the risk of deflation or low inflation outweighs the risk of overheating.
Labor Markets & Growth
There is a subtle but important linguistic shift. Moving from "deterioration is abating" (the rate of decline is slowing) to "stabilizing" (the decline has stopped) suggests a slight increase in confidence. However, the change from "weak labor market" to "high unemployment" is a shift toward more direct, stark language, acknowledging that while the trend is stabilizing, the level of unemployment remains a primary drag on consumption.
Forward Guidance
The core forward guidance ("exceptionally low levels... for an extended period") remains untouched, signaling a commitment to the lower bound. However, the language regarding the balance sheet has shifted from "process of purchasing" to "nearing completion." The most significant shift is the new, broader commitment to "employ its policy tools as necessary," which serves as a "placeholder" for future unconventional measures should the recovery stall.
The Committee remained Neutral to Slightly Dovish. While the Fed is cleaning up its balance sheet by closing emergency facilities (a nominally hawkish "normalization" step), the core policy stance remains aggressively accommodative. The shift in language from "abating" to "stabilizing" and the upgrade of business spending to "risen significantly" show a slight improvement in the economic outlook, but the explicit commitment to "employ its policy tools as necessary" suggests the Fed is not yet ready to signal a tightening cycle. The expanded dissent from Governor Hoenig provides the only hawkish note, warning that this prolonged dovishness is creating systemic financial risks.