As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from September 21, 2011, and November 2, 2011.
Information received since the Federal Open Market Committee met in ~~August~~ September indicates that economic growth ~~remains slow~~ strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has ~~been increasing at only a modest pace~~ increased at a somewhat faster 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~~ has continued to expand, but investment in nonresidential structures is still weak, and the housing sector remains depressed. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their 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 continues to expect ~~some pickup in the pace of recovery~~ a moderate pace of economic growth over coming quarters ~~but~~ and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, 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 support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with 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~~ continue its program to extend the average maturity of its holdings of securities as announced in September. ~~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 is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and 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 discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.~~ The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools ~~as appropriate~~ to promote a stronger economic recovery in a context of price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; 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 did not support additional policy accommodation at this time~~ was Charles L. Evans, who supported additional policy accommodation at this time.
| Removed | Added | Significance |
|---|---|---|
| "economic growth remains slow" | "strengthened somewhat in the third quarter" | Positive Shift: Acknowledgment of a slight uptick in GDP growth. |
| "increasing at only a modest pace" | "increased at a somewhat faster pace" | Positive Shift: Improvement in consumer demand/spending. |
| Detailed "Operation Twist" specs | "continue its program... as announced in September" | Administrative: Transition from announcing a new tool to maintaining it. |
| 3 dissenters (Hawks) | 1 dissenter (Dove) | Political Shift: Significant shift in Committee consensus toward accommodation. |
Inflation
There is no significant shift in the inflation narrative. The language regarding the moderation of energy/commodity prices and the stability of longer-term expectations remains verbatim. The Committee remains confident that inflation will settle at or below the target.
Labor Markets & Growth
There is a noticeable positive shift in the characterization of growth. The Committee moved from describing growth as "slow" to "strengthened somewhat," attributing this to the reversal of temporary headwinds. However, the labor market narrative remains stubbornly negative ("continuing weakness," "remains elevated"), suggesting the Committee believes growth is not yet strong enough to trigger a rapid decline in unemployment.
Forward Guidance
The forward guidance on the federal funds rate (the "mid-2013" anchor) remains unchanged. The guidance on balance sheet policy has shifted from "initiation" to "maintenance." The most critical shift is not in the text, but in the voting record: the "Hawks" (Fisher, Kocherlakota, Plosser) who previously opposed accommodation have now joined the majority, while a "Dove" (Evans) now dissents for wanting more stimulus.
The Committee has shifted Slightly Hawkish in its assessment of the economy, but significantly more Unified in its commitment to accommodation.
While the economic data described is "better" (stronger growth, faster spending), which usually signals a hawkish turn, the Committee did not tighten its guidance. Most importantly, the dramatic shift in the voting block—where the three primary hawks stopped dissenting against the accommodative stance—indicates that the "hawks" have accepted the current policy path. The tone is one of "cautious optimism" regarding growth, but a firm commitment to maintaining exceptionally low rates and the maturity extension program.