As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from January 26 and March 15, 2011. This period is critical as it captures the Fed's attempt to balance a fragile post-crisis recovery against a sudden spike in global commodity prices.
Information received since the Federal Open Market Committee met in ~~December~~ January ~~confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions~~ suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually. ~~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,~~ Household spending and business investment in equipment and software continue to expand. ~~while~~ However, investment in nonresidential structures is still weak~~. The housing sector continues to be depressed~~, and the housing sector continues to be depressed. ~~Although~~ Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks. Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been ~~trending downward~~ subdued.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate ~~is~~ remains elevated, and measures of underlying inflation ~~are~~ continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. ~~Although~~ The Committee ~~anticipates~~ continues to anticipate 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. 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; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; ~~Kevin M. Warsh;~~ and Janet L. Yellen.
| Removed | Added | Significance |
|---|---|---|
| "insufficient to bring about a significant improvement" | "on a firmer footing... improving gradually" | Bullish shift in growth and labor market outlook. |
| "trending downward" (inflation) | "subdued" | Shift from a negative trend to a stable, albeit low, level. |
| "progress... has been disappointingly slow" | "expects these effects to be transitory" | Removal of frustration; introduction of a specific caveat regarding oil prices. |
| Detailed list of constraints (housing wealth, tight credit) | "continue to expand" | Simplification of the narrative to emphasize momentum over headwinds. |
| Kevin M. Warsh | (N/A) | Change in voting membership. |
There is a marked shift in the inflation narrative. In January, the Fed viewed underlying inflation as "trending downward." By March, the tone has shifted to "subdued," but with a new, urgent acknowledgment of headline volatility. The explicit mention of "crude oil" and "global supplies" indicates that the Committee is now reacting to external supply shocks. Crucially, the Fed introduces the word "transitory" to describe these price spikes, signaling that they do not yet believe these costs are feeding into core inflation or wage-price spirals.
The assessment of the real economy has moved from "insufficient" to "firmer footing." The removal of the phrase "disappointingly slow" is a major psychological shift. The Committee has transitioned from describing a recovery hampered by specific constraints (credit, housing wealth) to a more generalized observation of expansion in household and business spending.
The forward guidance remains static. The language regarding the federal funds rate ("exceptionally low levels... for an extended period") and the QE2 purchase program ($600 billion) is identical. This suggests that while the Committee is more optimistic about growth and more concerned about oil, neither shift is yet strong enough to warrant a change in the actual policy trajectory.
The Committee has shifted Mildly Hawkish, despite the more optimistic growth outlook.
While the growth narrative is more positive (which is usually dovish), the introduction of specific warnings regarding "upward pressure on inflation" and the need to "pay close attention" to inflation expectations signals a heightened vigilance. The Fed is effectively "hedging" its optimism: it is happy the recovery is on a firmer footing, but it is now signaling that it will not ignore the risk of commodity-driven inflation. The removal of the "disappointingly slow" language suggests the Fed feels it has more room to tolerate inflation risks than it did in January.