As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from June 22, 2011, and August 9, 2011. This period represents a critical pivot in the Fed's assessment of the post-crisis recovery.
Information received since the Federal Open Market Committee met in ~~April~~ June indicates that ~~the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected.~~ economic growth so far this year has been considerably slower than the Committee had expected. ~~Also, recent labor market indicators have been weaker than anticipated.~~ Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending ~~and business investment in equipment and software continue to expand.~~ has flattened out, investment in nonresidential structures is still weak, and the housing sector ~~continues to be~~ remains depressed. However, business investment in equipment and software continues to expand. ~~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.~~ Temporary factors, 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, appear to account for only some of the recent weakness in economic activity. Inflation ~~has picked up in recent months~~ picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as ~~the~~ the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. ~~However,~~ Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. ~~The unemployment rate remains elevated; 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.~~ The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee ~~also~~ anticipates that inflation will ~~subside~~ settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee ~~continues to~~ currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate ~~for an extended period.~~ at least through mid-2013. 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 monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability.~~ The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.
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; and Janet L. Yellen.
Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.
| Removed | Added | Significance |
|---|---|---|
| "Recovery is continuing at a moderate pace" | "Growth... has been considerably slower" | Shift from "slow recovery" to "significant deterioration." |
| "Factors... likely to be temporary" | "Temporary factors... account for only some of the weakness" | Admission that structural/endogenous weakness is now present. |
| "For an extended period" | "At least through mid-2013" | Transition from qualitative to quantitative forward guidance. |
| "Monitor... and act as needed" | "Discussed the range of policy tools... prepared to employ" | Explicit signal that new stimulus (QE3) is on the table. |
| Unanimous vote | 3 Dissenters (Fisher, Kocherlakota, Plosser) | Internal conflict over the duration of low rates and inflation risks. |
The Committee has shifted from a stance of concern regarding rising prices to a more comfortable, perhaps even cautious, outlook. In June, inflation was "picking up"; by August, it has "moderated." The language has shifted from anticipating that inflation will "subside" to anticipating it will "settle" at or below target. This reduction in inflation pressure provides the Committee with the "policy space" to be more aggressive on the growth side.
There is a stark deterioration in the Committee's assessment. The June statement viewed the slowdown as "moderate" and largely "temporary" (Japan/Energy). The August statement removes this optimism, noting that labor market conditions have "deteriorated," the unemployment rate has "moved up," and household spending has "flattened." Crucially, the Committee now explicitly acknowledges that "downside risks to the economic outlook have increased."
This is the most significant strategic shift. The Committee moved from the vague "extended period" to a specific date: "at least through mid-2013." This is a move toward "Calendar-Based Guidance," designed to lower long-term interest rates by providing more certainty. Furthermore, the vague promise to "monitor" has been replaced by a specific mention of "the range of policy tools," a clear signal that the Committee is considering further asset purchases (Quantitative Easing).
The Committee has shifted decisively Dovish.
The transition is evidenced by three factors: (1) the admission that economic weakness is no longer just "temporary," (2) the hardening of forward guidance from a qualitative "extended period" to a quantitative "mid-2013" timeline, and (3) the explicit mention of "policy tools," which serves as a precursor to further monetary easing. The presence of three dissents—all of whom preferred the less-committal "extended period" language—confirms that the majority of the Committee pushed for a more aggressive, accommodative stance to combat increasing downside risks.