As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from April 27 and June 15, 2016.
Information received since the Federal Open Market Committee met in ~~March~~ April indicates that ~~labor market conditions have improved further even as~~ the pace of improvement in the labor market has slowed while growth in economic activity appears to have ~~slowed~~ picked up. ~~Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high.~~ Although the unemployment rate has declined, job gains have diminished. Growth in household spending has strengthened. Since the beginning of the year, the housing sector has ~~improved further~~ continued to improve and ~~business fixed investment and net exports have been soft~~ the drag from net exports appears to have lessened, but business fixed investment has been soft. ~~A range of recent indicators, including strong job gains, points to additional strengthening of the labor market.~~ Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and ~~falling~~ in prices of non-energy imports. Market-based measures of inflation compensation ~~remain low~~ declined; ~~survey-based~~ most 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. 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~~ past declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to 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; Esther L. George; 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 |
|---|---|---|
| "Labor market conditions have improved further" | "Pace of improvement in the labor market has slowed" | Significant. A pivot from viewing the labor market as accelerating to viewing it as decelerating. |
| "Growth in economic activity appears to have slowed" | "Growth in economic activity appears to have picked up" | Moderate. Suggests a slight rebound in GDP/activity despite labor softness. |
| "Growth in household spending has moderated" | "Growth in household spending has strengthened" | Moderate. Indicates stronger consumer resilience. |
| "Market-based measures... remain low" | "Market-based measures... declined" | Significant. Signals a drop in break-even inflation rates, increasing the risk of undershooting the 2% target. |
| Esther L. George (Voting against) | Esther L. George (Voting for) | High. The "hawk" on the committee has moved to the consensus, though the rate remained unchanged. |
Inflation:
The tone regarding inflation has shifted from "stable but low" to "concerningly soft." The change from "remain low" to "declined" regarding market-based inflation compensation is a critical signal. It suggests that the market is pricing in lower future inflation, which increases the Committee's caution regarding premature rate hikes.
Labor Markets & Growth:
There is a notable "decoupling" occurring here. In April, the labor market was the engine of strength while growth slowed. In June, the narrative has flipped: economic activity is "picking up" and spending is "strengthening," but the labor market is showing signs of fatigue ("job gains have diminished"). This suggests the Committee is now more concerned about the employment mandate than they were two months prior.
Forward Guidance:
The forward guidance remains virtually identical in the "In determining the timing..." paragraph. This indicates that while the underlying data has shifted, the Committee is not yet ready to change its strategic framework of "gradualism." They are maintaining a "wait-and-see" approach, leaning heavily on data-dependency.
The Committee has shifted Dovish.
While the federal funds rate remained unchanged, the narrative shift is clear. The Committee explicitly downgraded its assessment of the labor market (from "improved further" to "improvement... has slowed") and noted a decline in market-based inflation expectations. These two factors—slowing job gains and falling inflation expectations—provide a strong justification for delaying rate hikes. Interestingly, while Esther George (the primary hawk) joined the majority, the overall text of the statement reflects a more cautious, less confident outlook on the economy's momentum than the April statement.