As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from June 15 and July 27, 2016.
Information received since the Federal Open Market Committee met in ~~April~~ June indicates that ~~the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up~~ the labor market strengthened and that economic activity has been expanding at a moderate rate. ~~Although the unemployment rate has declined, job gains have diminished~~ Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months. ~~Growth in~~ Household spending has ~~strengthened~~ been growing strongly but business fixed investment has been soft. ~~Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened, but~~ Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation ~~declined~~ remain low; 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 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 past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook have diminished. 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.
Implementation Note issued July 27, 2016
| Removed | Added | Significance |
|---|---|---|
| "pace of improvement... has slowed" | "labor market strengthened" | Direct reversal of labor market narrative from cooling to warming. |
| "job gains have diminished" | "Job gains were strong in June... increase in labor utilization" | Shift from concern over hiring to recognition of tightening labor slack. |
| "housing sector... drag from net exports" | "Near-term risks... have diminished" | Removal of specific headwinds; explicit statement that the outlook is safer. |
| "inflation compensation declined" | "inflation compensation remain low" | Shift from a negative trend (declining) to a stable state (low). |
| Esther L. George (in "Voting for") | Esther L. George (Voting against/Dissent) | First formal dissent for a rate hike, signaling internal hawkish pressure. |
Inflation
The narrative on inflation has shifted from a "declining" trend to a "stable but low" state. While the Committee still acknowledges that inflation is below the 2% target, the change from "declined" to "remain low" suggests that the downward pressure has bottomed out. The core logic—that inflation will rise as labor markets strengthen—remains the central pillar of their medium-term outlook.
Labor Markets & Growth
This is the most aggressive shift in the statement. The June statement was cautious, noting that job gains had "diminished." The July statement completely pivots, describing the labor market as having "strengthened" and noting an "increase in labor utilization." By upgrading household spending from "strengthened" to "growing strongly," the Fed is signaling that the domestic economy is gaining momentum.
Forward Guidance
The boilerplate language regarding "gradual increases" remains unchanged, but the addition of the sentence "Near-term risks to the economic outlook have diminished" is a critical signal. By explicitly stating that risks are lower, the Committee is removing a primary justification for keeping rates low, effectively clearing the path for a future hike.
The Committee has shifted Hawkish.
While the federal funds rate remained unchanged, the textual evidence points toward a tightening bias. The Fed upgraded its assessment of the labor market (from "slowed" to "strengthened"), upgraded consumer spending, and explicitly stated that near-term risks have "diminished." Most tellingly, the emergence of a formal dissent from Esther L. George—who explicitly called for a 25bps rate hike—indicates that the internal balance of the Committee is shifting toward a more aggressive posture. The Fed is essentially signaling that the "accommodative" phase is nearing its end as the economy proves its resilience.