As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from June 18 and July 30, 2014. This period represents a critical phase of the "tapering" process following the Great Recession.
Information received since the Federal Open Market Committee met in ~~April~~ June indicates that growth in economic activity ~~has rebounded in recent months~~ rebounded in the second quarter. ~~Labor market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated.~~ Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment ~~resumed its advance~~ is advancing, while the recovery in the housing sector ~~remained~~ remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation ~~has been running below~~ has moved somewhat closer to 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 labor market conditions will continue to improve gradually, moving toward those~~, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for ~~the economy~~ economic activity and the labor market as nearly balanced, and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat. ~~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.~~
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 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 ~~July~~ August, the Committee will add to its holdings of agency mortgage-backed securities at a pace of ~~$15 billion~~ $10 billion per month rather than ~~$20 billion~~ $15 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of ~~$20 billion~~ $15 billion per month rather than ~~$25 billion~~ $20 billion per month. [Remaining text unchanged through the end of the policy guidance section].
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Narayana Kocherlakota; Loretta J. Mester; ~~Charles I. Plosser;~~ Jerome H. Powell; and Daniel K. Tarullo. Voting against was Charles I. Plosser who objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for "a considerable time after the asset purchase program ends," because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee's goals.
| Removed | Added | Significance |
|---|---|---|
| "Inflation has been running below..." | "Inflation has moved somewhat closer to..." | Bullish on Inflation: Explicit acknowledgment of progress toward the 2% target. |
| "Risks... persistently below 2% could pose risks" | "Likelihood of inflation running persistently below 2% has diminished" | Risk Re-assessment: Reduction in the perceived "deflationary" threat. |
| $15B MBS / $20B Treasuries | $10B MBS / $15B Treasuries | Quantitative Tightening: A further $10B/month reduction in the balance sheet expansion. |
| Charles I. Plosser (as "Voting for") | Charles I. Plosser (as "Voting against") | Internal Divergence: Highlights a growing hawkish minority wanting faster rate hikes. |
There is a marked shift in the characterization of inflation. In June, the Committee was focused on the risk of inflation remaining below the objective. By July, the language shifted to progress: inflation has "moved somewhat closer" to the goal, and the risk of persistent undershooting has "diminished somewhat." This is a critical pivot, as it removes one of the primary justifications for maintaining extreme accommodation.
The Committee is attempting a delicate balancing act. While they acknowledge the unemployment rate is "declining further," they introduced a new cautionary phrase: "significant underutilization of labor resources." This suggests that while the headline number is improving, the quality of the recovery (participation rates, underemployment) is not yet sufficient to warrant a full exit from stimulus.
The core forward guidance regarding the federal funds rate (the "considerable time" language) remained unchanged. However, the context of that guidance shifted. By reducing the pace of asset purchases (the taper) while keeping the rate guidance steady, the Committee is signaling a "slow-and-steady" approach to normalization. The inclusion of Plosser's dissent explicitly signals to the market that there is internal pressure to move faster.
Verdict: Moderately Hawkish
The statement is Hawkish for two primary reasons. First, the mechanical action: the Committee accelerated the tapering of asset purchases, reducing the monthly injection of liquidity by another $10 billion. Second, the inflation narrative: by stating that the risk of low inflation has "diminished," the Committee is effectively clearing the path for future rate hikes. While the "underutilization of labor" comment provides a dovish counterbalance, the combination of a further taper and the acknowledgment of inflation progress indicates a Committee that feels increasingly confident in the economy's resilience. The public dissent by Plosser further reinforces this hawkish tilt by signaling that the "ceiling" for policy accommodation is being reached.