As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from November 2 and December 13, 2011. This period is critical as the Committee was navigating the "Operation Twist" era and the lingering effects of the Great Recession.
Information received since the Federal Open Market Committee met in ~~September~~ November ~~indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year~~ suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. ~~Nonetheless, recent indicators point to continuing weakness in overall labor market conditions~~ While indicators point to some improvement in overall labor market conditions, and the unemployment rate remains elevated. Household spending ~~has increased at a somewhat faster pace in recent months~~ has continued to advance, but business ~~investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak~~ fixed investment appears to be increasing less rapidly 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~~, and 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 a moderate pace of economic growth over coming quarters 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~~ Strains in global financial markets continue to pose significant downside risks to the economic outlook. 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 continue its program to extend the average maturity of its holdings of securities as announced in September. 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 will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools 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 was Charles L. Evans, who supported additional policy accommodation at this time.
| Removed | Added | Significance |
|---|---|---|
| "economic growth strengthened somewhat in the third quarter..." | "economy has been expanding moderately, notwithstanding some apparent slowing in global growth" | Shift from celebrating a specific quarterly bounce to a more cautious, generalized view of growth amid global headwinds. |
| "continuing weakness in overall labor market conditions" | "some improvement in overall labor market conditions" | A subtle but important upgrade in the assessment of the labor market. |
| "Business investment... continued to expand" | "business fixed investment appears to be increasing less rapidly" | A clear downgrade in the outlook for business investment. |
| "as prices of energy and some commodities have declined..." | (Removed) | Removal of the specific driver for inflation moderation, suggesting a more general trend. |
| "Moreover, there are significant downside risks..." | "Strains in global financial markets continue to pose significant downside risks..." | Elevates "global financial strains" from a contributing factor to the primary driver of downside risk. |
Inflation:
The Committee remains confident that inflation is moderating and will settle at or below the target. However, the removal of the phrase "as the effects of past energy and other commodity price increases dissipate further" suggests the Committee is moving away from attributing inflation trends solely to volatile commodity prices and is now viewing the moderation as a broader economic trend.
Labor Markets & Growth:
There is a contradictory shift here. On one hand, the Committee acknowledges "some improvement" in labor market conditions (a positive shift from "continuing weakness"). On the other hand, the growth narrative has cooled; the specific mention of a strong third quarter is replaced by "expanding moderately," and business investment is now described as "increasing less rapidly." This suggests a "K-shaped" perception where employment is ticking up, but the underlying investment engine is stalling.
Forward Guidance:
The forward guidance remains identical. The target range (0 to 1/4%) and the time horizon for "exceptionally low levels" (mid-2013) were unchanged. This indicates that despite the slight improvements in labor and the slowing of business investment, the Committee does not yet see a reason to alter its policy trajectory.
The Committee remained Neutral to slightly Dovish. While the admission of "some improvement" in the labor market is technically hawkish, it is heavily offset by the downgrade in business investment and the heightened emphasis on "strains in global financial markets" as a primary risk. The fact that the Committee maintained the exact same forward guidance and the same dissenting vote (Charles Evans calling for more accommodation) indicates that the Committee is not yet ready to pivot toward tightening. The tone reflects a "wait-and-see" approach, balancing a slightly better jobs report against a fragile global backdrop.