As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from September 21, 2010, and November 3, 2010. This period represents a critical pivot in the Federal Reserve's approach to the Great Recession recovery.
Information received since the Federal Open Market Committee met in ~~August~~ September ~~indicates~~ confirms that the pace of recovery in output and employment ~~has slowed in recent months~~ continues to be slow. 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, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts ~~are at a depressed level~~ continue to be depressed. ~~Bank lending has continued to contract, but at a reduced rate in recent months.~~ Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, ~~the pace of economic recovery is likely to be modest in the near term~~ progress toward its objectives has been disappointingly slow.
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and 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 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.~~
The Committee will continue to monitor the economic outlook and financial developments and ~~is prepared to provide additional accommodation if needed~~ will employ its policy tools as necessary to support the economic recovery and to ~~return~~ help ensure that inflation, over time, is ~~to levels~~ consistent with its mandate.
| Removed | Added | Significance |
|---|---|---|
| "indicates... has slowed" | "confirms... continues to be slow" | Shift from observing a trend to confirming a stagnation. |
| "pace... likely to be modest" | "progress... disappointingly slow" | Significant upgrade in the negativity of the economic assessment. |
| "prepared to provide additional accommodation if needed" | "decided today to expand its holdings... $600 billion" | Shift from conditional readiness to active quantitative easing (QE2). |
| "return inflation... to levels" | "help ensure that inflation... is at levels" | Subtle shift toward managing inflation expectations rather than just "returning" to a target. |
There is a marked deterioration in the inflation outlook. In September, the Committee noted inflation was "likely to remain subdued for some time." By November, the language shifted to a more urgent tone, noting that underlying inflation has "trended lower in recent quarters." The Committee is no longer just waiting for inflation to rise; they are now actively intervening to "ensure" it reaches target levels, signaling a fear of deflationary pressure.
The characterization of the recovery has shifted from "modest" to "disappointingly slow." The removal of the sentence regarding bank lending (which had been contracting at a "reduced rate") suggests the Committee is less focused on the plumbing of the credit markets and more concerned with the aggregate lack of demand and the "elevated" unemployment rate.
While the guidance on the federal funds rate remains unchanged ("exceptionally low... for an extended period"), the guidance on the balance sheet has shifted from passive (reinvesting principal) to aggressive (active purchases). The introduction of a specific target—$600 billion of Treasuries—provides a concrete signal to markets that the Fed is committed to lowering long-term interest rates, not just short-term rates.
The Committee has shifted decisively Dovish.
The transition from "prepared to provide" accommodation to the actual implementation of a $600 billion asset purchase program (QE2) is a major policy escalation. Furthermore, the adoption of the phrase "disappointingly slow" is an unusually candid admission of failure in the recovery's pace, providing the necessary rhetorical justification for aggressive monetary expansion. The Fed has moved from a posture of "monitoring" to a posture of "intervention."