As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from October 28, 2015, and December 16, 2015. This transition represents a pivotal moment in the post-GFC era: the "Liftoff" (the first interest rate hike in nearly a decade).
Information received since the Federal Open Market Committee met in ~~September~~ October suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. ~~The pace of job gains slowed and the unemployment rate held steady. Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year.~~ A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year. Inflation has continued to run below the Committee's ~~longer-run~~ 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation ~~moved slightly lower~~ remain low; ~~survey-based measures of longer-term inflation expectations have remained stable~~ some survey-based measures of longer-term inflation expectations have edged down.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee ~~expects~~ currently expects that, with ~~appropriate policy accommodation~~ gradual adjustments in the stance of monetary policy, economic activity will ~~expand~~ continue to expand at a moderate pace, ~~with~~ and labor market indicators ~~continuing to move toward levels the Committee judges consistent with its dual mandate~~ will continue to strengthen. ~~The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments.~~ Overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced. Inflation is ~~anticipated to remain near its recent low level in the near term but the Committee expects inflation~~ expected to rise ~~gradually~~ toward 2 percent over the medium term as the ~~labor market improves further and the~~ transitory effects of declines in energy and import prices dissipate ~~and the labor market strengthens further~~ and the labor market strengthens further. 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.~~ The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
~~In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation.~~ In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to 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.~~ In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
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~~,~~ and it anticipates doing so until normalization of the level of the federal funds rate is well under way. 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; ~~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.~~ Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.
| Removed | Added | Significance |
|---|---|---|
| "Pace of job gains slowed" | "Confirms that underutilization... has diminished appreciably" | Shift from caution to confidence in labor market recovery. |
| "0 to 1/4 percent... remains appropriate" | "Raise the target range... to 1/4 to 1/2 percent" | The Liftoff: Transition from ZIRP (Zero Interest Rate Policy) to active tightening. |
| "Appropriate policy accommodation" | "Gradual adjustments in the stance of monetary policy" | Signal that the era of "accommodation" is shifting toward "normalization." |
| "Nearly balanced" (risks) | "Balanced" (risks) | Removal of "nearly" suggests a higher conviction in stability. |
| "Wait for further improvement" | "Expects... only gradual increases" | Forward guidance shifts from if/when to how fast (gradualism). |
The Committee has moved from a passive observation of low inflation to a more active "monitoring" phase. While they remain "reasonably confident" that inflation will return to 2%, the admission that survey-based expectations have "edged down" is a subtle warning. The language has shifted from expecting inflation to rise "gradually" to stating it "is expected to rise," while simultaneously adding a caveat that they will "carefully monitor" the shortfall.
There is a stark upgrade in the characterization of the labor market. The previous statement noted a "slowdown" in job gains; the current statement describes "considerable improvement" and "ongoing job gains." The labor market is no longer a hurdle to raising rates; it is now the primary justification for doing so.
The guidance has transitioned from conditional ("The Committee anticipates it will be appropriate to raise... when...") to prescriptive ("The Committee expects... only gradual increases"). By introducing the term "normalization," the Fed is signaling a long-term trajectory back to a neutral rate, though they emphasize "data-dependency" to avoid spooking the markets.
The Committee has shifted decisively Hawkish, though it is a "measured hawk" approach. The primary driver is the actual policy action: raising the federal funds rate for the first time in years. By removing the language regarding the need for "further improvement" in the labor market and replacing it with a confirmation that underutilization has "diminished appreciably," the Fed has cleared the runway for tightening. However, the repeated use of the word "gradual" and the commitment to keep rates below "longer run" levels serve as a dovish hedge to ensure the rate hike does not trigger a market panic. Overall, the move from "waiting" to "acting" marks a clear hawkish pivot.