As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from December 18, 2013, and January 29, 2014. This period represents a critical phase of "tapering" the Quantitative Easing (QE) program.
Information received since the Federal Open Market Committee met in ~~October~~ December indicates that ~~economic activity is expanding at a moderate pace~~ growth in economic activity picked up in recent quarters. ~~Labor market conditions have shown further improvement~~ Labor market indicators were mixed but on balance showed further improvement; the unemployment rate ~~has declined~~ declined but remains elevated. Household spending and business fixed investment advanced more quickly in recent months, while the recovery in the housing sector slowed somewhat ~~in recent months~~. Fiscal policy is restraining economic growth, although the extent of restraint ~~may be~~ is 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~~ economic activity will expand at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, 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 since the inception of its current asset purchase program, the Committee continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to make a further measured reduction in ~~modestly reduce~~ the pace of its asset purchases. Beginning in ~~January~~ February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $~~35~~ 30 billion per month rather than $~~40~~ 35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $~~40~~ 35 billion per month rather than $~~45~~ 40 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. 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. 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. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's 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. 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. The Committee continues to anticipate, 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 |
|---|---|---|
| "economic activity is expanding at a moderate pace" | "growth in economic activity picked up in recent quarters" | Bullish. Upgrades the description of growth from "moderate" to "picked up." |
| "Labor market conditions have shown further improvement" | "Labor market indicators were mixed but on balance showed further improvement" | Nuanced. Acknowledges volatility/mixed data while maintaining a positive trend. |
| "modestly reduce" | "make a further measured reduction" | Procedural. Signals that tapering is now a sequence of steps rather than a one-off event. |
| $35B MBS / $40B Treasuries | $30B MBS / $35B Treasuries | Hawkish. A concrete reduction in the monthly injection of liquidity. |
| "may be diminishing" (fiscal restraint) | "is diminishing" | Bullish. Increased confidence that fiscal headwinds are easing. |
The language regarding inflation remains static. The Committee continues to express concern that inflation is running below the 2% objective and monitors it carefully. There is no shift in the characterization of inflation, suggesting that while growth is picking up, the "price stability" side of the mandate remains the primary anchor preventing a faster tightening of policy.
There is a noticeable upward revision in the assessment of the real economy. The shift from "expanding at a moderate pace" to "picked up in recent quarters" is a significant signal of confidence. However, the Committee introduced the word "mixed" regarding labor indicators, suggesting they are seeing some divergence in the data (e.g., payrolls vs. unemployment rate) even as the overall trend remains positive.
The guidance on the Federal Funds Rate (the 6.5% unemployment threshold) remains unchanged, which serves as a "dovish" counterbalance to the tapering of asset purchases. By adding the phrase "continues to anticipate" regarding the rate range, the Committee is signaling that despite the reduction in QE, they are not yet ready to discuss lifting off from the zero lower bound.
The Committee has shifted Mildly Hawkish.
While the forward guidance on interest rates remained firmly dovish (maintaining the 6.5% threshold), the actual policy action—a further $10 billion per month reduction in asset purchases—is a tightening of liquidity. This action, coupled with the upgraded description of economic growth ("picked up"), indicates that the Committee feels the economy is gaining enough momentum to sustain itself with less support. The transition from "modestly reduce" to "further measured reduction" confirms that the Fed has entered a systematic phase of balance sheet normalization.