As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from December 14, 2010, and January 26, 2011.
Information received since the Federal Open Market Committee met in ~~November~~ December confirms that the economic recovery is continuing, though at a rate that has been insufficient to ~~bring down unemployment~~ bring about a significant improvement in labor market conditions. ~~Household spending is increasing at a moderate pace~~ Growth in household spending picked up late last year, 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~~ is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Although commodity prices have risen, longer-term inflation expectations have remained stable, ~~but~~ and measures of underlying inflation ~~have continued to trend~~ have been trending 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 continue expanding its holdings of securities 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.~~ In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. 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;~~ Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen. ~~Voting against the policy was Thomas M. Hoenig. In light of the improving economy, Mr. Hoenig was concerned that a continued high level of monetary accommodation would increase the risks of future economic and financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.~~
| Removed | Added | Significance |
|---|---|---|
| "bring down unemployment" | "bring about a significant improvement in labor market conditions" | Broadens the focus from just the headline rate to overall labor market health. |
| "increasing at a moderate pace" | "picked up late last year" | A slight upgrade in the assessment of consumer demand. |
| "though less rapidly than earlier in the year" | (Removed) | Removes a negative qualifier regarding business spending; suggests stability. |
| (None) | "Although commodity prices have risen" | Critical Addition. Acknowledges cost-push inflation risks while maintaining that core inflation is low. |
| "a pace of about $75 billion per month" | (Removed) | Simplifies the QE2 description; removes the specific monthly cadence. |
| Dissent by Thomas M. Hoenig | (Unanimous Vote) | Indicates a shift toward consensus; the "hawk" of the committee is no longer formally dissenting. |
Inflation:
The Committee has introduced a new nuance: the acknowledgement that commodity prices have risen. This is a strategic addition. By pairing the rise in commodities with the fact that "underlying inflation" (core) is still trending downward, the Fed is signaling that it views current price pressures as exogenous (supply-side) rather than demand-driven, justifying the continuation of accommodative policy.
Labor Markets & Growth:
There is a subtle but important shift in language regarding the labor market. Moving from "bring down unemployment" to "significant improvement in labor market conditions" suggests the Committee is looking at a broader set of metrics (e.g., labor force participation, underemployment) rather than just the U-3 unemployment rate. Additionally, the description of household spending as having "picked up" suggests a marginal increase in confidence in the recovery's momentum.
Forward Guidance:
The forward guidance remains virtually identical. The commitment to "exceptionally low levels for the federal funds rate for an extended period" and the continuation of the $600 billion asset purchase program (QE2) remain the anchors of the statement. The removal of the specific "$75 billion per month" phrasing slightly reduces the granularity of the guidance but maintains the overall trajectory.
The Committee has remained Neutral to slightly Dovish. While there is a marginal "upgrade" in the description of household spending, the overarching tone remains one of concern, as progress is still described as "disappointingly slow." The most significant shift is the disappearance of the formal dissent from Thomas Hoenig. The move toward a unanimous vote, combined with the dismissal of rising commodity prices as a reason to tighten, indicates a solidified commitment to aggressive monetary easing. The Fed is effectively "doubling down" on its accommodative stance despite emerging price pressures in commodities.