As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from March 13, 2012, and April 25, 2012.
Information received since the Federal Open Market Committee met in ~~January~~ March suggests that the economy has been expanding moderately. Labor market conditions have improved ~~further~~ in recent months; the unemployment rate has declined ~~notably in recent months~~ but remains elevated. Household spending and business fixed investment have continued to advance. ~~The~~ Despite some signs of improvement, the housing sector remains depressed. Inflation ~~has been subdued in recent months, although prices of crude oil and gasoline have increased lately~~ has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. ~~Longer-term~~ However, 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~~ to remain moderate over coming quarters and then to pick up gradually. ~~and consequently~~ Consequently, the Committee anticipates that the unemployment rate will decline gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets ~~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~~ earlier this year is expected to affect inflation only temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with 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 does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014.
| Removed | Added | Significance |
|---|---|---|
| "Inflation has been subdued... prices... increased lately" | "Inflation has picked up somewhat, mainly reflecting higher prices..." | Acknowledges a rise in headline CPI but attributes it to volatile energy components. |
| "The housing sector remains depressed" | "Despite some signs of improvement, the housing sector remains depressed" | Subtle shift toward optimism regarding the bottoming out of the housing market. |
| "expects moderate economic growth" | "expects... growth to remain moderate... and then to pick up gradually" | Upgraded growth forecast; introduces a trajectory of acceleration. |
| "Strains... have eased, though they continue to pose..." | "Strains... continue to pose significant downside risks" | Removes the "eased" qualifier, suggesting a renewed or persistent concern regarding global volatility. |
| "will push up inflation temporarily" | "is expected to affect inflation only temporarily" | Shifts from a definitive statement of fact to a probabilistic expectation (standard central bank hedging). |
Inflation
The Committee has shifted from describing inflation as "subdued" to acknowledging that it has "picked up somewhat." However, this is a controlled admission. By explicitly linking the rise to "crude oil and gasoline," the FOMC is signaling that this is headline inflation rather than core inflation. The insistence that longer-term expectations remain stable serves as a guardrail to prevent the market from pricing in a premature rate hike.
Labor Markets & Growth
There is a noticeable upgrade in the growth narrative. While the previous statement simply expected "moderate growth," the current statement forecasts a transition: moderate growth now, followed by a gradual "pick up." The labor market language has been slightly softened (removing "notably"), suggesting that while the trend is positive, the pace of improvement may be stabilizing.
Forward Guidance
The forward guidance remains identical. The "exceptionally low levels... through late 2014" anchor remains untouched. This indicates that despite the slight uptick in inflation and the improved growth outlook, the Committee is not yet ready to signal a tightening cycle.
The Committee has shifted Slightly Dovish to Neutral.
While the acknowledgment of rising inflation and improving growth usually leans hawkish, the FOMC neutralized this by attributing inflation to temporary energy shocks and explicitly upgrading the growth forecast to "pick up gradually." By projecting a stronger recovery, the Committee justifies maintaining "exceptionally low" rates to ensure that the recovery is sustainable. The removal of the phrase "strains... have eased" regarding global markets further suggests that the Committee still perceives significant external risks, justifying the continued accommodative stance.