As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from January 25, 2012, and March 13, 2012. This period is characterized by the "Operation Twist" era and the struggle to balance a fragile recovery with emerging commodity price volatility.
Information received since the Federal Open Market Committee met in ~~December~~ January suggests that the economy has been expanding moderately~~, notwithstanding some slowing in global growth~~. Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated. Household spending ~~has continued to advance, but growth in~~ and business fixed investment have continued to advance~~, and~~. The housing sector remains depressed. Inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately. ~~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 expects moderate 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. Strains in global financial markets ~~continue~~ have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that ~~over coming quarters,~~ subsequently inflation will run at ~~levels~~ the rate ~~at or~~ that it judges most consistent with ~~the Committee's~~ its dual mandate.
To support a stronger economic recovery and to help ensure that inflation, over time, is at ~~levels~~ the rate most consistent with ~~the~~ its 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 late 2014.
The Committee also decided 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.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who ~~preferred to omit the description of the time period over which~~ does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate ~~at least~~ through late 2014.
| Removed | Added | Significance |
|---|---|---|
| "notwithstanding some slowing in global growth" | "Labor market conditions have improved further... declined notably" | Shift from global headwinds to domestic strength; acknowledgment of labor market momentum. |
| "growth in business fixed investment has slowed" | "business fixed investment have continued to advance" | Direct upgrade in the assessment of private sector investment. |
| "Strains... continue to pose" | "Strains... have eased, though they continue to pose" | Reduction in the perceived urgency of global financial instability. |
| (General inflation stability) | "prices of crude oil and gasoline have increased lately... push up inflation temporarily" | Introduction of a "cost-push" inflation narrative; preempting market fears of a price spike. |
| "decline only gradually" | "decline gradually" | Subtle removal of "only," suggesting a slightly more optimistic path for employment. |
Inflation: From Subdued to "Temporarily Volatile"
In January, inflation was simply "subdued." By March, the Committee had to address a specific exogenous shock: rising energy prices. Crucially, the Committee characterizes this as a "temporary" push, signaling that they do not view this as a trend of broad-based demand-pull inflation. They are effectively "looking through" the energy spike to maintain their accommodative stance.
Labor Markets & Growth: Upgraded Outlook
The tone regarding the real economy has shifted from cautious to cautiously optimistic. The removal of the phrase "notwithstanding some slowing in global growth" and the upgrade of business investment from "slowed" to "continued to advance" indicates a strengthening of the domestic recovery. The labor market is no longer just "improving" but has "declined notably," suggesting the recovery is gaining traction.
Forward Guidance: Static but Contested
The core forward guidance—the "late 2014" anchor—remains unchanged. This provides a powerful signal of stability. However, the dissent by Jeffrey Lacker has evolved. In January, he objected to the description of the time period (a technical/communication objection); in March, he explicitly does not anticipate the need for low rates through 2014 (a fundamental policy objection).
The Committee has shifted Mildly Hawkish in its assessment of the economy, but remains Dovish in its policy action.
The "Hawkish" tilt comes from the upgraded economic data: stronger business investment, a notably improving labor market, and the admission of rising energy prices. Usually, stronger growth and rising prices lead to a tightening bias. However, because the Committee maintained the "late 2014" guidance and explicitly labeled the inflation spike as "temporary," the actual policy stance remains firmly accommodative. The statement represents a "confidence upgrade" in the recovery, which historically serves as a precursor to eventual tightening, even if the current action is neutral.