As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from September 17, 2014, and October 29, 2014. This period represents a critical pivot point in the post-crisis recovery, specifically the transition from Quantitative Easing (QE) to a "taper-off" phase.
Information received since the Federal Open Market Committee met in ~~July~~ September suggests that economic activity is expanding at a moderate pace. ~~On balance,~~ labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. ~~however, the unemployment rate is little changed and~~ On balance, a range of labor market indicators suggests that ~~there remains significant~~ underutilization of labor resources is gradually diminishing. Household spending ~~appears to be~~ is 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 ~~been running~~ continued to run below the Committee's longer-run objective. ~~Longer-term inflation expectations have remained stable.~~ Market-based measures of inflation compensation have declined somewhat; survey-based measures of 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~~ . Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.
The Committee ~~currently~~ judges that there has been a substantial improvement in the outlook for the labor market since the inception of ~~the~~ its current asset purchase program. ~~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 October, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $5 billion per month rather than $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month.~~ Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing ~~improvement in labor market conditions~~ progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this 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.~~ This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
~~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 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~~ the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain ~~the current 0 to 1/4 percent target range for the federal funds rate~~ this target range, 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~~ anticipates, based on its ~~assessment of these factors~~ current assessment, that it likely will be appropriate to maintain the ~~current~~ 0 to 1/4 percent target range for the federal funds rate for a considerable time ~~after~~ following the end of its asset purchase program ~~ends~~ this month, 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. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.
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.
| Removed | Added | Significance |
|---|---|---|
| "Significant underutilization of labor resources" | "Underutilization... is gradually diminishing" | Bullish on Labor: Shift from seeing a crisis of unemployment to seeing a recovery in progress. |
| "Fiscal policy is restraining economic growth" | (Deleted entirely) | Neutral/Political: Removal of explicit mention of fiscal drag, simplifying the narrative to monetary drivers. |
| "Measured reduction in the pace of asset purchases" | "Conclude its asset purchase program this month" | Hawkish: The transition from "tapering" (slowing down) to "stopping" (ending QE). |
| "Sizable and still-increasing holdings" | "Holdings... at sizable levels" | Hawkish: Acknowledgment that the balance sheet is no longer expanding. |
| Generic forward guidance on rate maintenance | Symmetric "Sooner/Later" conditional language | Hawkish/Transparent: Introduces a clear path to rate hikes if data exceeds expectations. |
The Committee is becoming more nuanced and slightly more concerned about the composition of inflation. While they still believe the risk of persistent undershooting has diminished, they introduce a new distinction between market-based measures (which declined) and survey-based measures (which remained stable). The explicit mention of "lower energy prices" as a near-term drag suggests the Fed is trying to separate "noise" (oil prices) from "signal" (underlying inflation).
There is a definitive shift in the characterization of the labor market. The September statement highlighted "significant underutilization"; the October statement describes that underutilization as "gradually diminishing" and cites "solid job gains." This provides the economic justification for ending the asset purchase program.
The guidance has evolved from "passive" to "active." In September, the Fed simply said they would maintain rates for a "considerable time." In October, they added a symmetric conditional clause: rates will rise sooner if progress is faster, or later if progress is slower. This is a classic "pre-conditioning" of the markets for the eventual first rate hike.
Verdict: Hawkish
The Committee has shifted decisively in a hawkish direction. The primary driver is the decision to conclude the asset purchase program (QE) entirely, moving from a phase of balance sheet expansion to a phase of maintenance. Furthermore, the introduction of the "sooner than currently anticipated" language regarding federal funds rate increases signals that the Fed is now actively preparing the market for a tightening cycle. While the "considerable time" language remains to prevent a premature spike in long-term yields, the overall trajectory has moved from "supporting the recovery" to "managing the exit."