As a senior economist and central bank strategist, I have performed a comparative analysis of the July 27 and September 21, 2016, FOMC statements. This period represents a critical juncture where the Committee was weighing a transition from an accommodative posture toward the first rate hike of the cycle.
Information received since the Federal Open Market Committee met in ~~June~~ July indicates that the labor market ~~strengthened~~ has continued to strengthen and ~~that economic activity has been expanding at a moderate rate~~ growth of economic activity has picked up from the modest pace seen in the first half of this year. ~~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.~~ Although the unemployment rate is little changed in recent months, job gains have been solid, on average. Household spending has been growing strongly but business fixed investment has ~~been~~ remained soft. 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 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~~ conditions will strengthen somewhat further. 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~~ appear roughly balanced. 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 Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives. 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~~ were: Esther L. George, Loretta J. Mester, and Eric Rosengren, 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 rate" | "growth... has picked up from the modest pace seen in the first half of this year" | Upgrades the growth narrative from "moderate" to "picking up." |
| "Near-term risks... have diminished" | "Near-term risks... appear roughly balanced" | Signals that the "downside" risk bias has vanished; the Committee is now neutral on risk. |
| (No equivalent text) | "The Committee judges that the case for an increase... has strengthened" | Crucial signal. Explicitly acknowledges that the threshold for a rate hike is being approached. |
| (Single dissenter: George) | (Three dissenters: George, Mester, Rosengren) | Indicates a significant shift in internal Committee consensus toward a more hawkish stance. |
Inflation:
The language regarding inflation remains virtually identical. The Committee continues to view the shortfall as a result of "transitory effects" of energy and import prices. There is no shift in the inflation narrative, suggesting that while growth is improving, the "inflation gap" remains the primary anchor preventing an immediate rate hike.
Labor Markets & Growth:
There is a clear upgrade here. The shift from "expanding at a moderate rate" to "picked up from the modest pace" indicates a strengthening real economy. The labor market description has evolved from "strengthened" (past tense) to "continued to strengthen" (ongoing process), suggesting the Committee sees a sustainable trend of improvement.
Forward Guidance:
The guidance has shifted from passive to active. While the "gradual" path remains, the addition of the sentence stating the "case for an increase... has strengthened" is a classic "pre-announcement." It prepares markets for a hike in the next meeting or shortly thereafter, moving the conversation from if to when.
The Committee has shifted Hawkish.
While the federal funds rate remained unchanged, the textual evidence is overwhelmingly skewed toward tightening. The Committee upgraded its assessment of GDP growth, shifted its risk assessment from "diminished" (downside) to "balanced," and explicitly stated that the case for a rate hike has "strengthened." Most tellingly, the internal dissent grew from one member to three, signaling that a significant portion of the Committee believes the current policy is too accommodative. This statement serves as a "warning shot" to the markets that the era of the 0.25%–0.50% range is nearing its end.