As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from January 29 and March 19, 2014. This period represents a critical pivot in the "tapering" process and a significant evolution in the Fed's forward guidance.
Information received since the Federal Open Market Committee met in ~~December~~ January indicates that growth in economic activity ~~picked up in recent quarters~~ slowed during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate ~~declined but~~ however, remains elevated. Household spending and business fixed investment ~~advanced more quickly in recent months~~ continued to advance, while the recovery in the housing sector ~~slowed somewhat~~ remained slow. Fiscal policy is restraining economic growth, although the extent of restraint 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 activity will expand at a moderate pace and ~~the unemployment rate will gradually decline toward levels~~ labor market conditions will continue to improve gradually, moving toward those 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.~~ The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions ~~over that period~~ since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in ~~February~~ April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $~~30~~ 25 billion per month rather than $~~35~~ 30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $~~35~~ 30 billion per month rather than $~~40~~ 35 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~~ remains 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 the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including 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~~ for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
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 currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
With the unemployment rate nearing 6-1/2 percent, the Committee has updated its forward guidance. The change in the Committee's guidance does not indicate any change in the Committee's policy intentions as set forth in its recent statements.
Voting for the FOMC monetary policy action were: ~~Ben S. Bernanke, Chairman;~~ Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Richard W. Fisher; ~~Narayana Kocherlakota;~~ Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; and Daniel K. Tarullo.
Voting against the action was Narayana Kocherlakota, who supported the sixth paragraph, but believed the fifth paragraph weakens the credibility of the Committee's commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity.
| Removed | Added | Significance |
|---|---|---|
| "growth... picked up in recent quarters" | "growth... slowed during the winter months... adverse weather" | Acknowledges a short-term dip in GDP/activity, attributing it to exogenous shocks (weather) rather than structural failure. |
| Specific 6.5% unemployment threshold for rate hikes | "assess progress--both realized and expected" | Major Shift: Moves from "Calendar/Threshold" guidance to "Qualitative/Outcome-based" guidance. |
| "well past the time that the unemployment rate declines below 6-1/2 percent" | "for a considerable time after the asset purchase program ends" | Decouples the federal funds rate from a specific unemployment number, increasing Fed flexibility. |
| (N/A) | "warrant keeping the target... below levels... normal in the longer run" | Introduces the concept of a "lower-for-longer" equilibrium (lower neutral rate $r^*$). |
| Unanimous vote | Dissent by Kocherlakota | Signals internal tension regarding inflation credibility and the clarity of forward guidance. |
The characterization of inflation remains largely unchanged—it is still running below the 2% objective. However, the strategic handling of inflation shifted. By removing the specific "half percentage point above 2%" ceiling for rate hikes, the Committee moved toward a more holistic assessment of inflation "progress" rather than a rigid numerical trigger.
There is a notable shift in the growth narrative. The January statement was optimistic ("picked up"); the March statement is cautious ("slowed during winter months"). However, the Committee explicitly separates this weather-related slowdown from the underlying trend, asserting there is "sufficient underlying strength" to continue tapering asset purchases. This allows them to remain hawkish on the balance sheet (tapering) while acknowledging a soft patch in the data.
This is the most significant shift in the document. The Committee has transitioned from Explicit Guidance (linking rates to a 6.5% unemployment threshold) to Implicit/Qualitative Guidance. By removing the 6.5% anchor, the Fed has regained the ability to adjust rates based on a "wide range of information" without being boxed in by a single metric. Furthermore, the introduction of the "below normal" long-run rate suggests the Fed is preparing the market for a permanent shift in the neutral rate of interest.
The Committee has shifted Dovish in its guidance, but Hawkish in its actions.
The action is Hawkish: The Committee continued the "taper," further reducing the pace of asset purchases (reducing MBS by $5bn and Treasuries by $5bn). This signals confidence in the economy's underlying strength despite the winter slowdown.
However, the language is Dovish: The removal of the 6.5% unemployment threshold and the admission that rates may stay "below levels... normal in the longer run" provides a massive safety net for the markets. It signals that even if unemployment drops quickly, the Fed is not in a rush to hike rates to historical norms. The presence of a dissent (Kocherlakota) specifically criticizing the "weakening" of the inflation commitment further confirms that the new guidance was designed to be more accommodative and less predictable.