As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from October 30 and December 18, 2013. This period represents a critical pivot in the "Taper" era of the post-crisis recovery.
Information received since the Federal Open Market Committee met in ~~September~~ October ~~generally suggests~~ indicates that economic activity ~~has continued to expand~~ is expanding at a moderate pace. ~~Indicators of~~ Labor market conditions have shown ~~some~~ further improvement~~, but~~; the unemployment rate ~~remains~~ has declined but remains elevated. ~~Available data suggest that~~ Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth~~. Apart from fluctuations due to changes in energy prices,~~, although the extent of restraint may be diminishing. 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 pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the ~~downside~~ risks to the outlook for the economy and the labor market as having ~~diminished, on net, since last fall~~ become more nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, ~~but it anticipates~~ and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
Taking into account the extent of federal fiscal retrenchment ~~over the past year~~ since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions ~~since it began its asset purchase program~~ over that period as consistent with growing underlying strength in the broader economy. ~~However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly,~~ In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. ~~the Committee decided to continue purchasing~~ Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of ~~$40 billion~~ $35 billion per month ~~and~~ rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of ~~$45 billion~~ $40 billion per month ~~rather than $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~~ The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and 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. ~~In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective.~~ If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. ~~Asset purchases~~ However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's ~~economic~~ outlook for the labor market and inflation ~~as well as its assessment of the likely efficacy and costs of such purchases~~.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view 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~~ The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent 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.~~ The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal. 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.
| Removed | Added | Significance |
|---|---|---|
| "downside risks... diminished" | "risks... become more nearly balanced" | Shift from a purely pessimistic outlook to a neutral risk profile. |
| "await more evidence... before adjusting" | "decided to modestly reduce the pace" | The Taper: Transition from observation to active reduction of QE. |
| "$40B MBS / $45B Treasuries" | "$35B MBS / $40B Treasuries" | Quantitative tightening of the monthly balance sheet expansion. |
| "assess whether incoming info supports" | "will likely reduce... in further measured steps" | Forward guidance shifts from "if" to "how" (measured steps). |
| (Implicit) 6.5% unemployment trigger | "maintain... well past the time... [unemployment] declines below 6-1/2%" | Decoupling the rate hike from a strict unemployment threshold. |
The Committee has moved from a stance of passive anticipation to active monitoring. While the previous statement "anticipated" inflation would move back toward the objective, the current statement notes it is "monitoring inflation developments carefully." This suggests a heightened awareness that inflation may remain stubbornly low, which serves as a justification for keeping interest rates low even as the labor market improves.
There is a clear upgrade in the assessment of the economy. The phrase "unemployment rate remains elevated" has been modified to "has declined but remains elevated," acknowledging tangible progress. Most importantly, the shift from "downside risks" to "more nearly balanced" risks indicates the Committee no longer fears a double-dip recession or a stalled recovery as acutely as it did in October.
The guidance has evolved in two directions:
1. Quantitative: The "Taper" has begun. The language has shifted from "awaiting evidence" to a commitment to "further measured steps," signaling a gradual wind-down of QE.
2. Interest Rates: The Committee has introduced a "dovish" hedge to its "hawkish" taper. By stating that rates will likely stay low "well past" the 6.5% unemployment mark, they are signaling that the end of QE does not mean an immediate hike in the federal funds rate.
The overall shift is Mixed/Neutral, but strategically "Hawkish on Quantity, Dovish on Price."
The statement is Hawkish regarding the balance sheet; the Committee has officially begun the "taper," reducing monthly asset purchases and signaling that further reductions are likely. However, the Committee balanced this by being Dovish regarding the federal funds rate, explicitly decoupling the rate hike from the 6.5% unemployment threshold. This was a calculated move to prevent a "Taper Tantrum" (market volatility) by reassuring investors that while the quantity of stimulus is decreasing, the cost of capital (interest rates) will remain exceptionally low for a longer period.