As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from December 2015 and January 2016. This period represents a critical juncture where the Committee transitioned from the first rate hike of the post-crisis era to a "wait-and-see" posture.
Information received since the Federal Open Market Committee met in ~~October~~ December suggests that ~~economic activity has been expanding at a moderate pace~~ labor market conditions improved further even as economic growth slowed late last year. Household spending and business fixed investment have been increasing at ~~solid~~ moderate rates in recent months, and the housing sector has improved further; however, net exports have been soft ~~and~~ and inventory investment slowed. A range of recent labor market indicators, including ~~ongoing~~ strong job gains, ~~shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year~~ points to some additional decline in underutilization of labor resources. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation ~~remain low~~ declined further; ~~some~~ survey-based measures of longer-term inflation expectations ~~have edged down~~ are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will ~~continue to~~ expand at a moderate pace and labor market indicators will continue to strengthen. Inflation is expected to ~~rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further~~ remain low in the near term, in part because of the further declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. ~~The Committee continues to monitor inflation developments closely~~ The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.
~~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~~ maintain the target range for the federal funds rate at 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.
[... Remaining sections on Forward Guidance and Balance Sheet remain unchanged ...]
| Removed | Added | Significance |
|---|---|---|
| "economic activity has been expanding at a moderate pace" | "economic growth slowed late last year" | Explicit acknowledgment of a growth deceleration. |
| "solid rates" (spending/investment) | "moderate rates" | Downgrade in the perceived strength of domestic demand. |
| "reasonably confident that inflation will rise" | "Inflation is expected to remain low in the near term" | Removal of "confidence" in inflation; admission of near-term headwinds. |
| "raise the target range... to 1/4 to 1/2 percent" | "maintain the target range... at 1/4 to 1/2 percent" | Shift from active tightening to a policy hold. |
| "monitor inflation developments closely" | "monitoring global economic and financial developments" | Broadening of risk focus to include external/global shocks. |
The shift here is markedly cautious. In December, the Committee expressed it was "reasonably confident" that inflation would return to 2%. By January, that confidence is gone. The addition of the phrase "remain low in the near term" acknowledges that the downward pressure from energy prices is more persistent than previously anticipated. The shift from "edged down" to "declined further" regarding market-based inflation measures indicates a deteriorating inflation outlook.
The Committee is now describing a "divergence" in the data. While they maintain a positive view of the labor market (upgrading "ongoing" gains to "strong" gains), they have explicitly admitted that "economic growth slowed late last year." The downgrade of spending and investment from "solid" to "moderate" suggests that the broader economy is not providing the same tailwind as the employment data.
While the boilerplate language regarding "gradual increases" remains intact, the operational guidance shifted from action to inaction. The removal of the phrase "recognizing the time it takes for policy actions to affect future economic outcomes" is subtle but important; that phrase is typically used to justify a rate move today for an effect tomorrow. Its removal signals a pause in the tightening cycle.
Verdict: Dovish Shift
The Committee shifted from a Hawkish/Neutral posture in December (where they actually raised rates) to a clearly Dovish posture in January. The rationale is three-fold: first, the decision to maintain rather than raise rates; second, the explicit admission that economic growth slowed and domestic investment moderated; and third, the removal of "confidence" regarding the inflation trajectory. By broadening their focus to "global economic and financial developments," the FOMC is signaling that external risks now outweigh the internal impulse to normalize policy.