As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from March 20 and May 1, 2013. This period is critical as it reflects the Committee's attempt to balance a fragile recovery with the need for explicit guidance on the "tapering" of asset purchases.
Information received since the Federal Open Market Committee met in ~~January~~ March suggests ~~a return to moderate economic growth following a pause late last year~~ that economic activity has been expanding at a moderate pace. Labor market conditions have shown ~~signs of~~ some improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy ~~has become somewhat more restrictive~~ is restraining economic growth. 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. 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 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. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. 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 |
|---|---|---|
| "a return to moderate economic growth following a pause late last year" | "economic activity has been expanding at a moderate pace" | Confidence Shift: Moves from describing a "return" (recovery from a dip) to a steady state of expansion. |
| "signs of improvement" | "some improvement... on balance" | Nuance: "On balance" suggests a more measured, data-driven view of the labor market rather than just seeing "signs." |
| "has become somewhat more restrictive" | "is restraining economic growth" | Severity: Shifts from a description of policy change to a description of the impact (active restraint). |
| (N/A) | "The Committee is prepared to increase or reduce the pace of its purchases..." | Flexibility/Tapering: This is the most critical addition. It explicitly signals that the QE pace is no longer fixed and can be adjusted. |
Neutral. There is no change in the language regarding inflation. The Committee maintains that inflation is running below objective (excluding energy) and that expectations remain stable. This suggests that inflation is not currently the primary driver of policy shifts.
Slightly Positive/More Confident. The shift from "a return to growth" to "expanding at a moderate pace" indicates the Committee believes the economy has moved past the "pause" of late 2012. However, the addition of "on balance" regarding labor market improvements suggests they are cautious and not yet convinced of a robust trend.
Increased Flexibility (The "Taper" Signal). The most significant thematic shift is the introduction of the sentence: "The Committee is prepared to increase or reduce the pace of its purchases..." This transforms the asset purchase program from a fixed-pace operation into a flexible tool. By explicitly mentioning the ability to "reduce the pace," the Fed is laying the groundwork for the "taper" of Quantitative Easing.
The Committee has shifted Mildly Hawkish.
While the federal funds rate guidance and the actual purchase amounts remained unchanged, the tone shifted toward the "exit" side of the door. By upgrading the description of economic growth (from "returning" to "expanding") and, most importantly, explicitly stating their readiness to reduce the pace of asset purchases, the Fed has signaled that the conditions for tightening (or at least slowing the stimulus) are beginning to emerge. The move from "somewhat more restrictive" to "restraining" regarding fiscal policy also suggests the Fed is acutely aware of the headwinds, but the new flexibility in QE suggests they feel the monetary stimulus has provided enough lift to allow for future adjustments.