As a senior economist and strategist, I have performed a comparative analysis of the FOMC statements from December 14, 2016, and February 1, 2017. This period represents a critical juncture in the "normalization" cycle following the Great Recession.
Information received since the Federal Open Market Committee met in ~~November~~ December indicates that the labor market has continued to strengthen and that economic activity has ~~been expanding~~ continued to expand at a moderate pace ~~since mid-year~~. Job gains ~~have been~~ remained solid ~~in recent months~~ and the unemployment rate ~~has declined~~ stayed near its recent low. Household spending has ~~been rising~~ continued to rise moderately ~~but~~ while business fixed investment has remained soft. Measures of consumer and business sentiment have improved of late. Inflation ~~has increased since earlier this year~~ increased in recent quarters but is still 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 ~~have moved up considerably but still~~ 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 expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will 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 appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to ~~raise~~ maintain the target range for the federal funds rate ~~to~~ at 1/2 to 3/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening 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;~~ Charles L. Evans; Stanley Fischer; ~~Esther L. George; Loretta J. Mester;~~ Patrick Harker; Robert S. Kaplan; Neel Kashkari; Jerome H. Powell; ~~Eric Rosengren;~~ and Daniel K. Tarullo.
| Removed | Added | Significance |
|---|---|---|
| "Raise" (target range) | "Maintain" (target range) | Shift from active tightening to a "pause" or hold. |
| "Partly reflecting earlier declines in energy prices..." | "Measures of consumer and business sentiment have improved..." | Moving away from blaming external shocks (oil) and toward internal demand drivers. |
| "Have moved up considerably" (inflation compensation) | "Remain low" | De-emphasizing the recent uptick in market-based inflation expectations. |
| "As the transitory effects... dissipate" | (Removed entirely) | Removal of "transitory" language suggests a more standard view of the inflation path. |
The Committee has moved from a descriptive explanation of why inflation was low (energy and import prices) to a more concise acknowledgment that it "increased in recent quarters" but remains below target. Notably, the removal of the phrase "moved up considerably" regarding market-based inflation compensation suggests the Committee is tempering expectations for a rapid inflation surge, opting for a more cautious "remain low" characterization.
The tone regarding the economy has shifted from "expanding" (active) to "continued to expand" (steady state). The labor market is no longer described as "declining" (in terms of unemployment) but as staying "near its recent low." This indicates the Committee perceives the labor market as having reached a plateau of strength rather than being in a state of rapid acceleration. The addition of "consumer and business sentiment" as a positive indicator suggests the Fed is looking for broader evidence of economic confidence to justify future hikes.
The forward guidance remains remarkably stable. The "gradual" path and "data-dependency" language are identical. However, the decision to maintain rather than raise the rate—despite the labor market remaining solid—signals a "wait-and-see" approach. The Committee is prioritizing the "shortfall of inflation" over the strength of the labor market in this specific meeting.
The Committee shifted Dovish (or more accurately, "Cautiously Neutral") compared to the previous statement. While the long-term trajectory remains geared toward tightening ("gradual increases"), the immediate action shifted from a rate hike in December to a hold in February. By removing the language that inflation compensation had "moved up considerably" and stripping out the explanation of transitory energy price declines, the Fed is signaling that it is not yet convinced that inflation is sustainably returning to 2%. The decision to maintain the rate despite a strong labor market confirms that inflation remains the primary constraint on policy tightening.