As a senior economist and central bank strategist, I have performed a comparative analysis of the July 29 and September 17, 2015, FOMC statements. This period was critical as the Committee navigated the transition toward the first rate hike in nearly a decade, while simultaneously managing emerging global volatility.
Information received since the Federal Open Market Committee met in ~~June~~ July ~~indicates~~ suggests that economic activity ~~has been expanding moderately in recent months~~ is expanding at a moderate pace. ~~Growth in~~ Household spending ~~has been moderate~~ and business fixed investment have been increasing moderately, and the housing sector ~~has shown additional improvement~~ has improved further; however, ~~business fixed investment and~~ net exports ~~stayed~~ have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, ~~a range of~~ labor market indicators ~~suggests~~ show that underutilization of labor resources has diminished since early this year. Inflation ~~continued~~ has continued to run below the Committee's longer-run objective, partly reflecting ~~earlier~~ declines in energy prices and ~~decreasing~~ in prices of non-energy imports. Market-based measures of inflation compensation ~~remain low~~ moved lower; 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. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, 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 ~~.~~ but is monitoring developments abroad. 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 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. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.
| Removed | Added | Significance |
|---|---|---|
| "Business fixed investment... stayed soft" | "Business fixed investment have been increasing moderately" | Positive Growth Signal: Upgrades the outlook for CAPEX, suggesting stronger domestic investment. |
| "Remain low" (Inflation compensation) | "Moved lower" | Inflation Warning: Shifts from a static state to a negative trend in market-based inflation expectations. |
| (N/A) | "Recent global economic and financial developments may restrain..." | External Risk: Explicitly acknowledges global headwinds (likely China/EM volatility) as a drag on growth and prices. |
| (N/A) | "But is monitoring developments abroad" | Risk Profile: Expands the risk assessment beyond domestic factors to include international instability. |
| Jeffrey M. Lacker (from "Voting for") | Jeffrey M. Lacker (Voting against/preferred 25bps hike) | Internal Divergence: Signals a growing internal appetite for tightening, despite the majority's hold. |
Inflation:
The tone regarding inflation has shifted from "stable but low" to "under pressure." The change from "remain low" to "moved lower" regarding market-based measures is a critical signal that the market is pricing in lower inflation. Furthermore, the addition of language regarding global developments putting "further downward pressure on inflation" suggests the Committee is becoming more concerned about the path to 2%.
Labor Markets & Growth:
The domestic outlook is actually stronger in the September statement. The upgrade of business fixed investment from "soft" to "increasing moderately" suggests a more robust recovery in the real economy. The labor market remains a pillar of strength, with the Committee continuing to see underutilization diminishing.
Forward Guidance:
The "trigger" for rate hikes (further labor market improvement and confidence in inflation) remains identical. However, the guidance is now tempered by a new layer of "global risk." The Committee is essentially saying: "The domestic economy is ready, but the world is getting volatile," which justifies the decision to hold rates despite the improved investment data.
The Committee shifted Dovish in its action and outlook, but Hawkish in its internal composition.
While the domestic economic data (business investment) improved—which would normally be hawkish—the Committee introduced significant cautionary language regarding global financial instability and declining inflation expectations. By explicitly stating that global developments could "restrain economic activity" and "put downward pressure on inflation," the FOMC provided a justification for delaying the rate hike. However, the fact that Member Lacker formally dissented in favor of a 25bps hike signals that the "Hawkish" wing of the bank is becoming impatient, creating a tension between the official statement and the voting record.