As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from July 30, 2014, and September 17, 2014. This period represents a critical phase of "tapering" the Quantitative Easing (QE) program.
Information received since the Federal Open Market Committee met in ~~June~~ July ~~indicates that growth in economic activity rebounded in the second quarter~~ suggests that economic activity is expanding at a moderate pace. ~~Labor market conditions improved, with the unemployment rate declining further~~ On balance, labor market conditions improved somewhat further; however, the unemployment rate is little changed and 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 is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation ~~has moved somewhat closer to~~ has been running below the Committee's longer-run objective. 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, 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 economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.
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 ~~August~~ October, the Committee will add to its holdings of agency mortgage-backed securities at a pace of ~~$10 billion~~ $5 billion per month rather than ~~$15 billion~~ $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of ~~$15 billion~~ $10 billion per month rather than ~~$20 billion~~ $15 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~~ will end its current program of asset purchases at its next meeting. 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 remains appropriate. 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 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.
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; 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~~ the action were Richard W. Fisher and Charles I. Plosser. President Fisher believed that the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee's stated forward guidance. President Plosser 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 |
|---|---|---|
| "growth... rebounded in the second quarter" | "expanding at a moderate pace" | Shift from highlighting a specific quarterly "bounce" to a more stable, moderate trend. |
| "unemployment rate declining further" | "unemployment rate is little changed" | Acknowledgment of a plateau in the unemployment rate; cooling of labor market optimism. |
| "moved somewhat closer to... objective" | "has been running below... objective" | Significant Downgrade. Moves from a narrative of progress to a narrative of deficiency regarding inflation. |
| "likely reduce the pace... in further measured steps" | "will end its current program... at its next meeting" | High Significance. Shifts from a vague "taper" to a specific timeline for the total cessation of QE. |
| $10B MBS / $15B Treasuries | $5B MBS / $10B Treasuries | Direct acceleration of the balance sheet runoff (tapering). |
| Single dissenter (Plosser) | Two dissenters (Fisher & Plosser) | Increasing internal friction; a growing "hawkish" wing concerned about financial excesses. |
There is a notable negative shift in the characterization of inflation. In July, the Committee noted inflation had "moved somewhat closer" to the 2% goal. By September, this was replaced with the more blunt admission that inflation "has been running below" the objective. This suggests that the Committee is seeing a stagnation or dip in price pressures, which provides a counter-weight to the tapering of asset purchases.
The tone has shifted from optimistic to cautious. The July statement highlighted a "rebound" and a "declining" unemployment rate. The September statement describes growth as merely "moderate" and explicitly notes that the unemployment rate is "little changed." The Committee is signaling that the labor market recovery may be hitting a plateau.
The guidance regarding asset purchases has moved from probabilistic to deterministic. The phrase "will likely reduce the pace" (July) has been replaced with "will end its current program... at its next meeting" (September). This is a massive signal to the markets that the QE era is nearing its absolute end, provided data remains consistent.
The Committee has shifted Hawkish on the balance sheet but Dovish on the federal funds rate.
The decision to accelerate the taper and provide a specific date for the end of asset purchases is a classic hawkish move, signaling a withdrawal of liquidity. This is further supported by the increase in dissenters (Fisher and Plosser) who are pushing for even faster normalization. However, the admission that inflation is "running below" the objective and the stagnation of the unemployment rate provide the justification for the Committee to keep the federal funds rate at 0-1/4% for a "considerable time." In essence, the Fed is "cleaning up" its balance sheet while simultaneously signaling that it is not yet ready to raise interest rates.