As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from December 13, 2011, and January 25, 2012. This period is critical as it marks a significant extension of the "exceptionally low" interest rate environment.
Information received since the Federal Open Market Committee met in ~~November~~ December suggests that the economy has been expanding moderately, notwithstanding some ~~apparent~~ slowing in global growth. While indicators point to some ~~improvement~~ further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but ~~business fixed investment appears to be increasing less rapidly~~ growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation ~~has moderated since earlier in the year~~ has been subdued in recent months, 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~~ expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. 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,~~ over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate. ~~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 expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today 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~~ late 2014.
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~~ 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 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 to promote a stronger economic recovery in a context of price stability.~~
| Removed | Added | Significance |
|---|---|---|
| "mid-2013" | "late 2014" | Major. Extends forward guidance by ~18 months, signaling a much longer horizon for zero-bound rates. |
| "moderate pace of economic growth" | "growth... to be modest" | Moderate. "Modest" is generally viewed as a step down from "moderate," signaling a weaker growth outlook. |
| "inflation has moderated" | "inflation has been subdued" | Moderate. "Subdued" suggests a more persistent lack of inflationary pressure than "moderated." |
| "pay close attention to... inflation" | "expects to maintain a highly accommodative stance" | Major. Shifts focus from monitoring inflation risks to explicitly committing to aggressive easing. |
| "business fixed investment... increasing less rapidly" | "growth in business fixed investment has slowed" | Minor. More definitive language regarding the decline in business investment. |
The Committee has shifted from describing inflation as having "moderated" (a change in trend) to being "subdued" (a state of being). More importantly, the Committee removed the cautionary sentence regarding "paying close attention to the evolution of inflation." This suggests the Committee is less concerned about an upside inflation surprise and more concerned about the risk of deflation or insufficient demand.
There is a subtle but important degradation in the growth outlook. The shift from "moderate" to "modest" growth indicates a lowering of expectations for the GDP trajectory. While labor market indicators show "further improvement," the Committee maintains that the unemployment rate will decline "only gradually," reinforcing the need for prolonged support.
This is the most aggressive change in the statement. The Committee has not only pushed the "exceptionally low" rate window from mid-2013 to late 2014 but has introduced the explicit phrase "highly accommodative stance for monetary policy." This provides a stronger qualitative commitment to easing beyond just the federal funds rate.
Verdict: Strongly Dovish
The Committee has shifted significantly in a dovish direction. The primary driver is the dramatic extension of forward guidance (pushing the rate floor out by a year and a half) and the explicit commitment to a "highly accommodative stance." By downgrading growth expectations from "moderate" to "modest" and removing the cautionary language regarding inflation monitoring, the FOMC has signaled that the risks to the economy are overwhelmingly skewed to the downside, necessitating a longer and more aggressive period of monetary stimulus.