As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from June 17 and July 29, 2015. This period is critical as the Committee was navigating the "liftoff" phase—determining exactly when to raise the federal funds rate for the first time since the Great Recession.
Information received since the Federal Open Market Committee met in ~~April~~ June ~~suggests~~ indicates that economic activity has been expanding moderately ~~after having changed little during the first quarter~~ in recent months. ~~The pace of job gains picked up while the unemployment rate remained steady.~~ Growth in household spending has been moderate and the housing sector has shown ~~some~~ additional improvement; however, business fixed investment and net exports stayed soft. ~~On balance, a range of labor market indicators suggests that underutilization of labor resources diminished somewhat.~~ The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year. Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports~~; energy prices appear to have stabilized~~. Market-based measures of inflation compensation remain low; 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 continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices 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. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen ~~further~~ some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
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.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.
| Removed | Added | Significance |
|---|---|---|
| "suggests" / "after having changed little during the first quarter" | "indicates" / "in recent months" | Shift from tentative observation to a more definitive statement of current trend. |
| "some improvement" (housing) | "additional improvement" | Signals a strengthening trend in the housing sector. |
| "diminished somewhat" (labor) | "continued to improve... solid job gains... diminished since early this year" | Significant upgrade in the assessment of labor market tightness. |
| "energy prices appear to have stabilized" | (Removed) | De-emphasizing the stabilization of energy prices to focus on the broader inflation trend. |
| "further improvement" | "some further improvement" | Crucial nuance: Lowers the bar for the labor market threshold required for a rate hike. |
The characterization of inflation remains largely unchanged and cautious. The Committee continues to view the current low levels as a result of "transitory effects" (energy and imports). However, by removing the specific mention that energy prices "appear to have stabilized," the Committee is shifting the focus away from the cause of the dip and toward the trajectory of the recovery toward 2%.
This is the most aggressive area of change. The language has shifted from "diminished somewhat" to "solid job gains and declining unemployment." By stating that underutilization has diminished "since early this year," the Committee is establishing a sustained trend of improvement rather than a momentary uptick. The housing sector is also upgraded from "some" to "additional" improvement, signaling broader economic resilience.
The most critical strategic shift is the insertion of the word "some" before "further improvement in the labor market." In central bank parlance, this is a "stealth" hawkish signal. By changing the requirement from "further improvement" to "some further improvement," the Committee is signaling that the labor market is very close to the threshold required for a rate hike.
Verdict: Hawkish Shift
While the Committee maintained the target rate at 0 to 1/4 percent, the tone shifted decisively toward a rate hike. The upgrade in labor market descriptions ("solid job gains") combined with the subtle lowering of the bar for liftoff ("some further improvement") indicates that the Committee is becoming more confident that the economy can sustain higher rates. The shift from "suggests" to "indicates" further reflects a transition from a data-gathering phase to a decision-making phase.