As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from December 2014 and January 2015. This period is critical as it captures the Committee's struggle to balance a strengthening labor market against a collapsing energy price environment.
Information received since the Federal Open Market Committee met in ~~October~~ December suggests that economic activity ~~is expanding~~ has been expanding at a ~~moderate~~ solid pace. Labor market conditions ~~improved~~ have improved further, with ~~solid~~ strong job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has ~~continued to run~~ declined further below the Committee's longer-run objective, ~~partly~~ largely reflecting declines in energy prices. Market-based measures of inflation compensation have declined ~~somewhat further~~ substantially in recent months; 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 ~~moving~~ continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee ~~sees~~ continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to decline further in the near term, but 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~~ over the medium term 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.
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 and international 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 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 |
|---|---|---|
| "moderate pace" / "solid job gains" | "solid pace" / "strong job gains" | Bullish Growth: Upgrading adjectives indicates the real economy is strengthening faster than expected. |
| "continued to run below" / "partly" | "declined further below" / "largely" | Bearish Inflation: Acknowledges a sharper drop in CPI driven by the oil price crash. |
| "somewhat further" (inflation comp) | "substantially in recent months" | Market Alarm: Admits that market-based inflation expectations are cratering. |
| Reference to "considerable time" guidance | (Removed entirely) | Guidance Pivot: Removing the anchor to the October asset purchase end-date increases flexibility. |
| (N/A) | "and international developments" | External Focus: Signals that global volatility (likely oil/China) is now a key policy input. |
Inflation: From "Below Target" to "Active Decline"
The Committee has shifted from describing inflation as merely "running below" the objective to acknowledging it is "declining further." Crucially, they have introduced a temporal distinction: inflation will drop in the near term but recover over the medium term. This is a classic central bank maneuver to prevent a deflationary panic while justifying why they aren't cutting rates further (or restarting QE).
Labor Markets & Growth: Upgraded Confidence
There is a clear upgrade in the description of the real economy. "Moderate" becomes "solid," and "solid" becomes "strong." The addition of "household purchasing power" being boosted by lower energy prices suggests the Fed views the oil crash as a "tax cut" for consumers, which offsets the negative impact on the energy sector.
Forward Guidance: Increased Flexibility
The most significant structural change is the removal of the sentence linking current policy to the "considerable time" guidance following the end of QE in October. By scrubbing this specific reference, the Fed is distancing itself from previous rigid timelines, making the "patient" language more data-dependent and less tied to the calendar.
Verdict: Neutral to Slightly Dovish
While the upgrades to growth and labor market language are Hawkish (suggesting the economy can handle higher rates), they are completely offset by the alarm regarding inflation and the removal of restrictive guidance. The admission that market-based inflation measures have declined "substantially" and the explicit forecast of further near-term inflation declines create a strong "deflationary" headwind. By removing the "considerable time" anchor, the Fed is keeping its options open, but the overarching tone is one of caution. The Committee is essentially saying: "The economy is stronger than we thought, but inflation is scarier than we thought, so we are staying put."