As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from April 27 and June 22, 2011. This period is critical as the Committee grapples with the "headwinds" of commodity price shocks and the fragile nature of the post-Great Recession recovery.
Information received since the Federal Open Market Committee met in ~~March~~ April indicates that the economic recovery is ~~proceeding~~ continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. ~~and overall conditions in the labor market are improving gradually.~~ Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. ~~Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the Committee met in March.~~ Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. ~~but~~ However, longer-term inflation expectations have remained stable ~~and measures of underlying inflation are still subdued~~.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated~~, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it~~; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will pay close attention to the evolution of inflation and inflation expectations. ~~The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.~~
To promote the ongoing ~~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 will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter.~~ keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee ~~will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability.~~ continues to anticipate that economic conditions—including low rates of resource utilization~~, subdued inflation trends,~~ and a subdued outlook for inflation over the medium run ~~stable inflation expectations~~—are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
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~~ act as needed to best foster maximum employment and price stability.
| Removed | Added | Significance |
|---|---|---|
| "Improving gradually" (Labor) | "Weaker than anticipated" | Acknowledgment of a slowdown in the labor market recovery. |
| "Proceeding at a moderate pace" | "Continuing... though somewhat more slowly" | Explicit admission that growth is underperforming expectations. |
| "Effects to be transitory" | "Subside... as effects... dissipate" | Shift from a general label ("transitory") to a specific mechanism of decline. |
| "Promote a stronger pace" | "Promote the ongoing... recovery" | Subtle shift from trying to accelerate growth to sustaining current growth. |
| "Subdued inflation trends" | "Subdued outlook... over the medium run" | Refinement of the inflation horizon to the "medium run" to ignore short-term noise. |
Inflation:
The Committee has moved from a general observation that inflation is "picking up" to a more diagnostic approach. They now explicitly attribute the rise to "imported goods" and "supply chain disruptions" (Japan earthquake/tsunami). Crucially, they have shifted from calling effects "transitory" to predicting that inflation will "subside to levels at or below" the mandate. This suggests the Committee is trying to reassure markets that current price spikes are not indicative of a long-term trend.
Labor Markets & Growth:
There is a marked deterioration in the Committee's assessment. In April, the labor market was "improving gradually"; by June, indicators are "weaker than anticipated." The growth narrative has shifted from a steady "proceeding" to a "continuing... though more slowly" pace. The Committee is now explicitly linking this slowdown to external shocks (energy prices and Japan), framing the weakness as "temporary."
Forward Guidance:
The guidance on the federal funds rate remains anchored ("exceptionally low... for an extended period"), but the justification has shifted. The Committee replaced "subdued inflation trends" with a "subdued outlook for inflation over the medium run." This is a strategic pivot: by focusing on the medium run, the Fed is signaling that it will not react to short-term inflation spikes caused by oil or supply chains.
The Committee has shifted Dovish.
While the federal funds rate remained unchanged, the narrative shifted significantly toward acknowledging economic weakness. The admission that growth is "more slow than expected" and labor indicators are "weaker than anticipated" creates a stronger justification for maintaining accommodative policy. Furthermore, by explicitly attributing inflation to temporary supply-side shocks and focusing on the "medium run" outlook, the Committee is effectively "looking through" current inflation. This reduces the likelihood of a premature rate hike, signaling a commitment to support the recovery despite rising headline prices.