As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from October 29, 2014, and December 17, 2014. This period is critical as it marks the transition from the "tapering" phase to the "patient" phase of monetary normalization.
Information received since the Federal Open Market Committee met in ~~September~~ October suggests that economic activity is expanding at a moderate pace. Labor market conditions improved ~~somewhat~~ further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources ~~is gradually diminishing~~ continues to diminish. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices. Market-based measures of inflation compensation have declined somewhat further; 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. ~~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 expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.
~~The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this month.~~
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain 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. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program ~~this month~~ in October, 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.
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. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
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 |
|---|---|---|
| "is gradually diminishing" | "continues to diminish" | Shifts from a description of a process starting to a confirmation of a trend. |
| General phrasing on inflation risks | "partly reflecting declines in energy prices" / "transitory effects" | Explicitly attributes low inflation to external shocks (oil) rather than systemic failure. |
| Asset purchase program conclusion text | (Removed as it is now a past event) | Shifts focus from Quantitative Easing (QE) to the Federal Funds Rate. |
| "considerable time" (as standalone) | "can be patient" | Introduces the "Patient" keyword, a major signal to markets to lower rate hike expectations. |
| Unanimous/Single dissent | Multiple dissents (Fisher, Kocherlakota, Plosser) | Indicates significant internal fragmentation regarding the timing of normalization. |
The Committee has shifted from a general observation that inflation is low to a more specific, diagnostic approach. By introducing the term "transitory effects of lower energy prices," the Fed is signaling that it does not believe the current inflation dip is a sign of renewed deflationary pressure, but rather a temporary commodity shock. This allows them to remain "patient" without fearing they are ignoring a collapse in price stability.
The language has evolved from "improved somewhat" to "improved further" and "continues to diminish" (regarding underutilization). This indicates the Committee is increasingly confident that the labor market is nearing its "maximum employment" threshold, which theoretically clears the path for future rate hikes.
This is the most significant shift. The introduction of the phrase "can be patient" is a strategic pivot. While the previous statement focused on the end of asset purchases, this statement focuses on the timing of the first rate hike. By framing "patience" as consistent with "a considerable time," the Fed is attempting to anchor market expectations and prevent a premature spike in long-term yields.
The Committee has shifted Dovish.
While the labor market data is strengthening (Hawkish), the Committee countered this by introducing the "patient" guidance and explicitly attributing low inflation to transitory energy prices. The most telling evidence of a Dovish tilt is the increase in dissents; three members now disagree with the majority, with some arguing for faster normalization. By choosing the "patient" path despite strong labor data and internal pressure to hike, the Committee has signaled a preference for more caution and a longer period of accommodation than the market may have anticipated.