As a senior economist and central bank strategist, I have conducted a comparative analysis of the FOMC statements from May 1 and June 19, 2013. This period is critical as the Committee began refining its "exit strategy" language during the early recovery phase.
Information received since the Federal Open Market Committee met in ~~March~~ May suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown ~~some~~ further 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 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.~~ Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but 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 sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. 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~~ were 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, and James Bullard, who believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings.
| Removed | Added | Significance |
|---|---|---|
| "some improvement" | "further improvement" | Signals an accelerating trend in labor market recovery. |
| "somewhat below... apart from temporary variations" | "Partly reflecting transitory influences... running below" | A subtle shift in how inflation is characterized; "transitory" is now the primary lens. |
| "continues to see downside risks" | "downside risks... as having diminished since the fall" | Major shift. Explicitly acknowledges a reduction in economic peril. |
| James Bullard (Voting For) | James Bullard (Voting Against) | Indicates growing internal dissent regarding the inflation target. |
Inflation:
The Committee has shifted from describing inflation as "somewhat below" the objective to simply "below," while introducing the term "transitory influences." This suggests the Committee is attempting to rationalize current low inflation as a temporary phenomenon rather than a structural trend, thereby justifying the continuation of accommodative policy despite the "below target" reading.
Labor Markets & Growth:
There is a clear positive trajectory here. The change from "some" to "further" improvement in labor conditions, coupled with the explicit statement that downside risks have "diminished since the fall," indicates the Committee is becoming more confident in the resilience of the recovery.
Forward Guidance:
The core forward guidance (the 6.5% unemployment threshold and the 2.5% inflation ceiling) remains unchanged. However, by stating that downside risks have diminished, the Committee is subtly preparing the markets for an eventual transition toward tightening, even while maintaining the status quo for now.
The Committee has shifted Mildly Hawkish.
While the policy action (rates and QE) remained unchanged, the narrative shifted toward confidence. By explicitly stating that downside risks have "diminished," the FOMC is removing the "emergency" justification for its extreme accommodation. Furthermore, the shift of James Bullard to the "Voting Against" column—specifically because he wanted a stronger signal to defend the inflation goal—indicates a growing internal tension between those who want to maintain the stimulus and those who fear the risks of undershooting the inflation target. The overall tone is one of a Committee that sees the "fog clearing" on the recovery, which is the necessary precursor to future policy normalization.