As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from September 13, 2012, and October 24, 2012.
Information received since the Federal Open Market Committee met in ~~August~~ September suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending ~~has continued to advance~~ has advanced a bit more quickly, but growth in business fixed investment ~~appears to have slowed~~ has slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation ~~has been subdued, although the prices of some key commodities have increased recently~~ recently picked up somewhat, reflecting higher energy prices. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee ~~is~~ remains concerned that, without ~~further~~ sufficient 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 also anticipates that inflation over the medium term likely would run at or below 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 ~~agreed today to increase policy accommodation by purchasing~~ will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of ~~securities~~ Treasury securities, 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. 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 exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.
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 additional asset purchases and ~~preferred to omit~~ disagreed with the description of the time period over which ~~exceptionally low levels for the federal funds rate~~ a highly accommodative stance of monetary policy will remain appropriate and exceptionally low levels for the federal funds rate are likely to be warranted.
| Removed | Added | Significance |
|---|---|---|
| "has continued to advance" | "has advanced a bit more quickly" | Slight upgrade to consumer spending strength. |
| "appears to have slowed" | "has slowed" | Increased certainty regarding the decline in business investment. |
| "has been subdued..." | "recently picked up somewhat... energy prices" | Acknowledgment of rising headline inflation, though attributed to volatile energy. |
| "is concerned" / "further" | "remains concerned" / "sufficient" | Shift from "adding more" to "maintaining enough" support. |
| "agreed today to increase" | "will continue purchasing" | Transition from a policy announcement to a policy maintenance phase. |
| "securities" | "Treasury securities" | Clarification of the specific asset class for the maturity extension program. |
Inflation
There is a notable shift in the characterization of inflation. The September statement described inflation as "subdued." By October, the Committee acknowledges that inflation has "picked up somewhat." However, by explicitly attributing this to "higher energy prices," the Committee is signaling that this is a supply-side shock rather than demand-pull inflation, thereby justifying the continuation of accommodative policy despite the uptick.
Labor Markets & Growth
The Committee is slightly more optimistic about the consumer ("advanced a bit more quickly") but more definitive about the weakness in business investment ("has slowed" vs "appears to have slowed"). The core concern remains the labor market; the change from "is concerned" to "remains concerned" suggests a persistent stagnation in employment that the Committee believes still requires active intervention.
Forward Guidance
The forward guidance remains remarkably stable. The "mid-2015" anchor for the federal funds rate is unchanged, and the commitment to a "highly accommodative stance" remains. The primary shift is operational: the Committee has moved from the act of increasing accommodation (September) to the maintenance of that accommodation (October).
The Committee remained Neutral to slightly Dovish. While the acknowledgment of rising inflation is typically a hawkish signal, the Committee neutralized this by attributing it to energy prices and maintaining the "mid-2015" rate guidance. The shift from "further policy accommodation" to "sufficient policy accommodation" suggests the Committee is no longer in an aggressive expansionary phase but is firmly committed to a "floor" of support to prevent a labor market relapse. The tone is one of cautious persistence.