As a senior economist and central bank strategist, I have performed a comparative analysis of the August 9 and September 21, 2011, FOMC statements. This period represents a critical pivot where the Committee moved from passive observation of a slowing economy to active balance sheet intervention.
Information received since the Federal Open Market Committee met in ~~June~~ August indicates that economic growth ~~so far this year has been considerably slower than the Committee had expected~~ remains slow. ~~Indicators suggest a deterioration in~~ Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate ~~has moved up~~ remains elevated. Household spending ~~has flattened out~~ has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. ~~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 picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions.~~ Inflation ~~More recently, inflation~~ appears to have moderated ~~as~~ since earlier in the year as prices of energy and some commodities have declined from their ~~earlier~~ peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee ~~now expects a somewhat slower pace of recovery~~ continues to expect some pickup in the pace of recovery over coming quarters but 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~~ there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will 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~~ support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with ~~its~~ the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. ~~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 and is prepared to adjust those holdings as appropriate.
To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.
The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and ~~The Committee~~ 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 at least through mid-2013. ~~The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.~~
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~~ its 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; 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~~ did not support additional policy accommodation at this time.
| Removed | Added | Significance |
|---|---|---|
| "considerably slower than... expected" | "remains slow" | Shift from "surprise" to a "baseline" of weakness. |
| "downside risks... have increased" | "significant downside risks... including strains in global financial markets" | Explicitly identifies systemic/global risk as a primary concern. |
| Standard FFR maintenance language | Detailed "Operation Twist" ($400B maturity extension) | Shift from passive rate maintenance to active balance sheet management. |
| General reinvestment policy | Specific agency MBS reinvestment strategy | Targeted support for the housing/mortgage market. |
| Dissenters' preference for "extended period" | Dissenters' opposition to "additional policy accommodation" | Dissenters are now fighting new tools, not just the duration of low rates. |
The Committee has moved from a descriptive phase (explaining why inflation rose—Japan, commodities) to a conclusive phase. By removing the detailed explanation of "temporary factors" and simply stating that inflation "appears to have moderated," the Fed is signaling that the inflation risk is now secondary to the growth risk. The focus has shifted from monitoring a potential spike to confirming a subdued outlook.
There is a subtle but important shift in the characterization of the recovery. In August, the Fed noted growth was "considerably slower than expected." By September, it is simply "slow." While they still expect a "pickup," the addition of "significant downside risks" and "strains in global financial markets" suggests the Committee is becoming more pessimistic about the organic recovery and more concerned about external shocks.
The forward guidance on the Federal Funds Rate (FFR) remains anchored ("at least through mid-2013"). However, the nature of the guidance has shifted. The Fed is no longer just talking about the short end of the curve; it is now providing explicit guidance on the long end of the curve via the maturity extension program. This is a shift from "interest rate guidance" to "financial conditions guidance."
Verdict: Strongly Dovish
The Committee has shifted significantly in a dovish direction. While the target federal funds rate remained unchanged, the Fed transitioned from a "wait-and-see" posture to an active interventionist posture. The introduction of "Operation Twist" (the $400 billion maturity extension) and the targeted reinvestment into agency MBS are aggressive moves designed to lower long-term borrowing costs and support the housing market. Furthermore, the explicit mention of "strains in global financial markets" justifies this expansion of the policy toolkit, signaling that the Committee believes the economy cannot recover on its own without further monetary accommodation.