As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from June 20 and August 1, 2012. This period is critical as it reflects the Fed's struggle with a sluggish post-crisis recovery and the emergence of "Operation Twist" (the maturity extension program).
Information received since the Federal Open Market Committee met in ~~April~~ June suggests that ~~the economy has been expanding moderately this year~~ economic activity decelerated somewhat over the first half of this year. Growth in employment has ~~slowed~~ been slow in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending ~~appears to be rising~~ has been rising at a somewhat slower pace than earlier in the year. Despite some ~~signs~~ further signs of improvement, the housing sector remains depressed. Inflation has declined ~~,~~ since earlier this year, 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 very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. 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 through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, ~~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.~~ and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee ~~is prepared to take further action as appropriate~~ will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery 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; 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 ~~opposed continuation of the maturity extension program~~ preferred to omit the description of the time period over which economic conditions are likely to warrant an exceptionally low level of the federal funds rate.
| Removed | Added | Significance |
|---|---|---|
| "economy has been expanding moderately" | "economic activity decelerated somewhat" | Major Downgrade: Shift from growth to deceleration. |
| "growth... has slowed" | "growth... has been slow" | Tonal Shift: From a process of slowing to a state of stagnation. |
| Detailed explanation of maturity extension (Operation Twist) | "as announced in June" | Administrative: Removing the "how-to" as the market is now acclimated. |
| "prepared to take further action as appropriate" | "will provide additional accommodation as needed" | Increased Commitment: "As needed" is a stronger signal of willingness to act. |
| Lacker's opposition to maturity extension | Lacker's opposition to forward guidance (time period) | Internal Shift: Dissent moved from QE/Twist to the specifics of the "late 2014" guidance. |
Inflation
The characterization of inflation remains largely stable, but the addition of "since earlier this year" emphasizes a continuing downward trend. The Committee remains concerned that inflation is running "at or below" target, reinforcing the need for stimulus.
Labor Markets & Growth
This is the most significant shift. The Committee has moved from describing the economy as "expanding moderately" (June) to "decelerated somewhat" (August). The change from "growth... has slowed" to "has been slow" suggests that the Committee no longer views the slowdown as a temporary dip, but as a persistent state of weakness.
Forward Guidance
While the "late 2014" anchor for the federal funds rate remains unchanged, the closing sentence of the statement has become more explicit. Moving from being "prepared to take further action" to promising "additional accommodation as needed" signals a higher readiness to deploy new tools (potentially QE3) if the deceleration persists.
The Committee has shifted decidedly Dovish.
The primary driver is the stark downgrade of the economic outlook—replacing "expanding moderately" with "decelerated somewhat." By acknowledging a deceleration in activity and a stagnant labor market, the Fed is creating the narrative justification for further easing. Furthermore, the transition to language promising "additional accommodation as needed" is a classic central bank signal that the current policy mix may be insufficient, effectively priming the markets for further unconventional monetary stimulus.