As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from August 10, 2010, and September 21, 2010. This period is critical as it reflects the Fed's struggle with a sluggish post-crisis recovery and the emergence of undershooting inflation targets.
Information received since the Federal Open Market Committee met in ~~June~~ August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising~~; however,~~, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak ~~and~~. employers remain reluctant to add to payrolls. Housing starts ~~remain~~ are at a depressed level. Bank lending has continued to contract~~.~~, but at a reduced rate in recent months.** ~~Nonetheless,~~ the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be ~~more~~ modest in the near term ~~than had been anticipated~~.
~~Measures of underlying inflation have trended lower in recent quarters and,~~ Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. ~~with~~ With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to ~~be~~ remain subdued for some time ~~before rising to levels the Committee considers consistent with its mandate~~.
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~~ for the federal funds rate for an extended period. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.
~~To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.~~ The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.
~~The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.~~
(Voting records omitted for brevity in redline, but noted in analysis)
| Removed | Added | Significance |
|---|---|---|
| "trended lower in recent quarters" | "levels somewhat below those the Committee judges most consistent" | Shift from describing a trend to acknowledging a gap relative to a target (implicit inflation target). |
| "more modest... than had been anticipated" | "modest in the near term" | Removal of the admission of a forecasting error; normalization of the slow growth outlook. |
| Specifics on agency debt/Treasury rollovers | "maintain its existing policy of reinvesting" | Simplification of QE language, moving from operational detail to a general policy stance. |
| "employ its policy tools as necessary" | "prepared to provide additional accommodation if needed" | Crucial shift. "Additional accommodation" is a direct signal that the Fed is open to more QE or new tools if recovery stalls. |
There is a significant shift in how the Committee views inflation. In August, inflation was simply "trending lower." By September, the Fed explicitly states that inflation is "below those the Committee judges most consistent" with its mandate. This is a pivotal moment where the Fed begins to signal concern over disinflation or deflationary risks, rather than just observing a downward trend. The addition of the phrase "return inflation, over time, to levels consistent with its mandate" confirms that the Fed now views current inflation as too low.
The tone regarding growth has shifted from "surprised" to "resigned." The removal of "than had been anticipated" suggests the Committee has baked the slow recovery into its baseline. However, there are slight nuances in the data: business spending is slowing ("less rapidly than earlier in the year"), but bank lending is improving ("at a reduced rate [of contraction]"). Overall, the labor market remains the primary drag, with the "reluctance to add to payrolls" remaining a constant.
The forward guidance has become more aggressive. While the "exceptionally low levels for an extended period" remains, the Committee added a new, potent signal: they are "prepared to provide additional accommodation if needed." This is a "conditional" forward guidance that warns markets that the Fed is not done with unconventional easing if the data doesn't improve.
The Committee has shifted decidedly Dovish.
While the federal funds rate remained unchanged, the textual changes reveal a growing anxiety about the pace of recovery and the level of inflation. By explicitly stating that inflation is below target and signaling a readiness to provide "additional accommodation," the Fed has lowered the threshold for further easing. The shift from "employing tools" (neutral) to "additional accommodation" (dovish) indicates that the Committee is leaning toward more aggressive intervention to combat the risk of a prolonged stagnation.