As a senior economist and central bank strategist, I have conducted a comparative analysis of the FOMC statements from March 16 and April 27, 2016. This period is characterized by a delicate balancing act: a strengthening labor market versus sluggish inflation and slowing GDP growth.
Information received since the Federal Open Market Committee met in ~~January suggests that economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months~~ March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed. ~~Household spending has been increasing at a moderate rate, and the housing sector has improved further; however, business fixed investment and net exports have been soft~~ Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high. Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation ~~picked up in recent months; however, it continued~~ has continued to run below the Committee's 2 percent longer-run objective, partly reflecting ~~declines~~ earlier declines in energy prices and ~~in prices of~~ falling prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations 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 expand at a moderate pace and labor market indicators will continue to strengthen. ~~However, global economic and financial developments continue to pose risks.~~ Inflation is expected to remain low in the near term, in part because of earlier 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~~ closely monitor inflation indicators and global economic and financial developments.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 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. 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.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.
| Removed | Added | Significance |
|---|---|---|
| "economic activity has been expanding at a moderate pace" | "growth in economic activity appears to have slowed" | Bearish Growth: A direct admission that GDP momentum is fading. |
| "Household spending has been increasing at a moderate rate" | "Growth in household spending has moderated" | Cooling Demand: Signals a slowdown in the primary driver of the US economy. |
| "Inflation picked up in recent months" | "Inflation has continued to run below..." | Inflation Concern: Removes the positive note that inflation was "picking up," highlighting the persistent shortfall. |
| "global economic... developments continue to pose risks" (as a standalone sentence) | "...closely monitor inflation indicators and global economic and financial developments" | Integration of Risk: Moves global risks from a primary warning to a secondary monitoring item. |
Inflation:
The shift here is subtle but critical. The March statement noted that inflation had "picked up in recent months," providing a glimmer of hope for a return to the 2% target. The April statement deletes this phrase entirely, stating instead that inflation "has continued to run below" the objective. This suggests that the "pick up" was either transitory or insufficient, increasing the Committee's concern regarding price stability.
Labor Markets & Growth:
There is a clear divergence emerging between the labor market and the broader economy. While the Committee explicitly states that labor market conditions "have improved further," they simultaneously admit that overall economic activity "appears to have slowed" and household spending has "moderated." This creates a "decoupling" narrative: the jobs market is strong, but the growth engine is sputtering.
Forward Guidance:
The forward guidance remains virtually identical. The commitment to "gradual increases" and the data-dependent approach are unchanged. However, the factual backdrop provided in the first two paragraphs provides the context for this guidance; by highlighting slowing growth and persistent low inflation, the Committee is signaling that the "gradual" path may be slower than previously anticipated.
Verdict: Dovish Shift
While the federal funds rate remained unchanged and the formal guidance was preserved, the tonal shift is decidedly dovish. The Committee removed optimistic language regarding inflation ("picked up") and replaced a "moderate pace" of growth with an admission that growth "appears to have slowed." By emphasizing the moderation of household spending and the persistence of low inflation, the Committee has effectively lowered the probability of a near-term rate hike, despite the continued strength of the labor market. The "dovishness" is found in the data characterization, which provides the justification for maintaining an accommodative stance for longer.