As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from November 3, 2010, and December 14, 2010.
Information received since the Federal Open Market Committee met in ~~September~~ November confirms that ~~the pace of recovery in output and employment continues to be slow~~ the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing ~~gradually~~ at a moderate pace, 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 continue to be depressed~~ The housing sector continues to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have ~~trended lower in recent quarters~~ continued to trend downward.
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, 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~~ continue expanding 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~~ as announced in November. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase $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 will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
Voting against the policy was Thomas M. Hoenig. ~~Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this~~ In light of the improving economy, ~~continued~~ a continued high level of monetary accommodation ~~increased~~ would increase the risks of future ~~financial~~ economic and financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.
| Removed | Added | Significance |
|---|---|---|
| "pace of recovery... continues to be slow" | "recovery is continuing, though... insufficient to bring down unemployment" | Slight upgrade in growth perception, but emphasizes the "jobless recovery." |
| "increasing gradually" | "increasing at a moderate pace" | Subtle upgrade in the characterization of consumer demand. |
| "trended lower in recent quarters" | "continued to trend downward" | Signals that disinflationary pressures are persistent, not a one-time dip. |
| "expand its holdings" | "continue expanding... as announced in November" | Shifts from a "new" action to the "execution" of an existing program (QE2). |
| "risks... outweighed the benefits" | "In light of the improving economy" | The dissenter (Hoenig) now acknowledges economic improvement, though still opposes the policy. |
Inflation
The shift from "trended lower" to "continued to trend downward" is critical. It suggests that the Committee is seeing a persistent deflationary trend rather than a temporary fluctuation. This reinforces the justification for maintaining aggressive monetary stimulus.
Labor Markets & Growth
There is a nuanced upgrade in the growth narrative. Moving from a "slow" pace of recovery to a recovery that is "continuing" (albeit insufficient for employment) and describing spending as "moderate" rather than "gradual" suggests the Committee sees a slight strengthening in the real economy. However, the focus remains heavily on the failure of this growth to translate into payrolls.
Forward Guidance
The guidance remains largely unchanged. The commitment to "exceptionally low levels for the federal funds rate for an extended period" remains the anchor. The primary shift is in the asset purchase language, moving from the announcement of a new program to the maintenance of the program announced in November.
The Committee remained Neutral to slightly Dovish. While there were minor "hawkish" upgrades to the description of economic growth (e.g., "moderate pace" vs "gradually"), these were completely offset by the admission that inflation has "continued to trend downward" and that growth remains "insufficient to bring down unemployment." The core policy—both the zero-bound interest rates and the $600 billion QE program—remains fully intact. The tone suggests a Committee that sees a glimmer of recovery but is terrified of deflation and a stagnant labor market, thereby justifying the continuation of aggressive easing.