As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from January 30 and March 20, 2013.
Information received since the Federal Open Market Committee met in ~~December~~ January suggests ~~that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors~~ a return to moderate economic growth following a pause late last year. ~~Employment has continued to expand at a moderate pace~~ Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has ~~shown further improvement~~ strengthened further, but fiscal policy has become somewhat more restrictive. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in 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 expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. ~~Although strains in global financial markets have eased somewhat,~~ the Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will 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 ~~will~~ decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee 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 and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain 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 Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, ~~until such improvement is achieved~~ until the outlook for the labor market has improved substantially in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
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 asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.
| Removed | Added | Significance |
|---|---|---|
| "growth... paused... because of weather-related disruptions" | "return to moderate economic growth following a pause" | Shifts narrative from "temporary shock" to "recovery resumed." |
| "Employment has continued to expand at a moderate pace" | "Labor market conditions have shown signs of improvement" | Subtle upgrade in the assessment of labor market momentum. |
| (N/A) | "but fiscal policy has become somewhat more restrictive" | Critical: Introduces a new headwind (fiscal drag) to justify continued easing. |
| "Although strains in global financial markets have eased" | (Removed) | Removes a positive signal regarding global stability. |
| "If the outlook... does not improve" | "until the outlook... has improved substantially" | Shifts from a conditional "if" to a definitive "until," strengthening the commitment to QE. |
| (N/A) | "as well as the extent of progress toward its economic objectives" | Broadens the criteria for evaluating asset purchases. |
Inflation
There is no shift in the characterization of inflation. The language remains identical, indicating that the Committee views inflation as still running below target and expectations as well-anchored. This suggests that inflation is not currently the primary driver of policy changes.
Labor Markets & Growth
The Committee has upgraded its view of the economy. It has moved from describing a "pause" caused by weather to a "return to moderate growth." Similarly, the labor market is no longer just expanding at a "moderate pace" but is showing "signs of improvement." However, the addition of the phrase "fiscal policy has become somewhat more restrictive" is a strategic pivot; it signals that while the economy is improving, external political/fiscal factors are creating new risks that may offset those gains.
Forward Guidance
The guidance on the federal funds rate (the 6.5% unemployment threshold) remains unchanged. However, the language regarding Quantitative Easing (QE) has become more assertive. By changing "If the outlook... does not improve" to "until the outlook... has improved substantially," the Committee has shifted from a conditional stance to a commitment-based stance.
The Committee has shifted Dovish.
While the economic data described is slightly more positive (growth returning, labor market improving), the Committee countered this by introducing "restrictive fiscal policy" as a new risk and strengthening the language regarding the continuation of asset purchases (changing "if" to "until"). By explicitly highlighting fiscal headwinds and hardening its commitment to QE, the FOMC is signaling that it will not be prematurely swayed by modest improvements in data. The removal of the mention of "easing strains in global financial markets" further removes a potential justification for tightening.