As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from April 25, 2012, and June 20, 2012. This period is critical as it reflects the Committee's reaction to a cooling recovery and the strategic use of "Operation Twist" (maturity extension).
Information received since the Federal Open Market Committee met in ~~March~~ April suggests that the economy has been expanding moderately ~~.~~ this year. ~~Labor market conditions have improved in recent months;~~ However, growth in employment has slowed in recent months, and the unemployment rate ~~has declined but~~ remains elevated. Business fixed investment has continued to advance. Household spending ~~and business fixed investment have continued to advance~~ appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed. Inflation ~~has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. However,~~ has declined, mainly reflecting lower prices of crude oil and gasoline, 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 economic growth to remain moderate over coming quarters and then to pick up ~~gradually~~ very gradually. Consequently, the Committee anticipates that the unemployment rate will decline ~~gradually~~ only slowly toward levels that it judges to be consistent with its dual mandate. ~~Strains~~ Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. ~~The increase in oil and gasoline prices earlier this year is expected to affect inflation only temporarily, and the Committee anticipates that subsequently~~ The Committee anticipates that inflation over the medium term 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~~ through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative. The Committee is maintaining its existing ~~policies~~ policy 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~~ . The Committee is prepared to ~~adjust those holdings~~ take further action as appropriate to promote a stronger economic recovery ~~in a context of price stability~~ and sustained improvement in labor market conditions 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.~~ Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; 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~~ opposed continuation of the maturity extension program.
| Removed | Added | Significance |
|---|---|---|
| "Labor market conditions have improved" | "Growth in employment has slowed" | Major Shift: Pivot from optimism to concern regarding the labor market. |
| "Pick up gradually" / "Decline gradually" | "Pick up very gradually" / "Decline only slowly" | Pessimism: Lowering expectations for the speed of the recovery. |
| "Inflation has picked up somewhat" | "Inflation has declined" | Disinflationary Pressure: Shift from worrying about oil spikes to observing a decline. |
| Generic reference to maturity extension | Detailed mechanics of Treasury purchases/sales | Transparency/Commitment: Explicitly signaling the intent to lower long-term rates. |
| "Adjust those holdings" | "Sustained improvement in labor market conditions" | Mandate Focus: Explicitly linking future action to employment outcomes. |
The narrative has shifted from cautionary to comfortable. In April, the Committee was noting a "pick up" in inflation due to energy prices. By June, they explicitly state inflation has "declined." The removal of the phrase regarding oil prices being "temporary" suggests that the immediate inflation scare has passed, and the Committee is now more focused on the "subdued outlook" over the medium term.
There is a marked deterioration in the Committee's assessment. The April statement noted that labor conditions "have improved." The June statement completely reverses this, noting that employment growth "has slowed." Furthermore, the addition of modifiers like "very gradually" and "only slowly" indicates a significant downgrade in the projected pace of the economic recovery.
While the federal funds rate guidance (late 2014) remains unchanged, the operational guidance has expanded. The Committee moved from a vague mention of the maturity extension program to a detailed explanation of its mechanics (selling short-term, buying long-term). Most importantly, the "prepared to take further action" clause now explicitly mentions "sustained improvement in labor market conditions," signaling that the labor market is now the primary trigger for future stimulus.
The Committee has shifted decisively Dovish.
While the target federal funds rate remained unchanged, the surrounding rhetoric shifted from "moderate improvement" to "slowing growth." By downgrading the speed of the recovery ("only slowly") and explicitly linking future policy actions to the labor market's performance, the FOMC signaled a higher readiness to provide further stimulus. The detailed commitment to continue the maturity extension program to put "downward pressure on longer-term interest rates" further confirms a dovish tilt aimed at combating a weakening economic trajectory.