As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from August 1 and September 13, 2012. This period represents a critical pivot toward what would become "QE3."
Information received since the Federal Open Market Committee met in ~~June~~ August suggests that economic activity ~~decelerated somewhat over the first half of this year~~ has continued to expand at a moderate pace in recent months. Growth in employment has been slow ~~in recent months~~, and the unemployment rate remains elevated. ~~Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year.~~ Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector ~~remains depressed~~ has shown some further signs of improvement, albeit from a depressed level. Inflation ~~has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline~~ has been subdued, although the prices of some key commodities have increased recently, 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.~~ The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee ~~anticipates~~ also anticipates that inflation over the medium term ~~will run~~ likely would run at or below the rate that it judges most consistent with its dual mandate (its 2 percent objective).
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~~ agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. ~~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 will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, 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. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. ~~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.~~ If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also 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 are likely to be warranted at least through ~~late 2014~~ mid-2015.
| Removed | Added | Significance |
|---|---|---|
| "decelerated somewhat" | "continued to expand at a moderate pace" | Shift from describing a slowdown to a stable, albeit slow, expansion. |
| "unemployment rate will decline only slowly" | "concerned that... growth might not be strong enough" | Shift from a passive prediction to an active concern requiring intervention. |
| "expects to maintain a highly accommodative stance" | "increase policy accommodation by purchasing... $40bn/month" | Transition from general guidance to a specific, aggressive balance sheet expansion (QE3). |
| "through late 2014" | "through mid-2015" | Extension of the "lower-for-longer" window for the Fed Funds Rate. |
| General "additional accommodation" | Specific "labor market" triggers for asset purchases | Introduction of state-contingent forward guidance tied to employment outcomes. |
The characterization of inflation has shifted from a description of past movement ("has declined") to a description of current state ("has been subdued"). Notably, the Committee has explicitly introduced its "2 percent objective" into the text, providing a concrete anchor for the market. The mention of rising commodity prices suggests the Committee is monitoring upside risks, but these are clearly overshadowed by growth concerns.
There is a profound shift in the Committee's psychology regarding the labor market. In August, the Fed viewed the slow decline of unemployment as an inevitable trajectory. By September, the tone shifted to urgency. The phrase "concerned that, without further policy accommodation, economic growth might not be strong enough" signals that the Fed no longer believes the recovery is self-sustaining.
The guidance has evolved from calendar-based to outcome-based. While they extended the calendar date for low rates (late 2014 $\rightarrow$ mid-2015), they introduced a powerful new commitment: they will continue asset purchases "until such improvement [in the labor market] is achieved." This is a significant escalation in commitment, effectively tying the balance sheet to employment levels.
Verdict: Strongly Dovish
The Committee has shifted aggressively Dovish. This is not merely a change in adjectives, but a change in policy tools. The Fed moved from "monitoring" the situation to launching a massive, open-ended asset purchase program ($40bn/month in MBS). By extending the Fed Funds Rate guidance to mid-2015 and explicitly linking future purchases to labor market outcomes, the Committee has signaled that it is willing to do "whatever it takes" to prevent a stagnation of the recovery. The shift from "moderate growth" to "concern" over the lack of "sustained improvement" justifies the pivot toward more aggressive easing.