As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from February 1 and March 15, 2017. This period marks a critical transition in the normalization cycle.
Information received since the Federal Open Market Committee met in ~~December~~ February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate ~~stayed near its recent low~~ was little changed in recent months. Household spending has continued to rise moderately while business fixed investment ~~has remained soft~~ appears to have firmed somewhat. Inflation ~~increased~~ has increased in recent quarters, ~~but is still below~~ moving close to the Committee's 2 percent longer-run objective; excluding energy and food prices, inflation was little changed and continued to run somewhat below 2 percent. Market-based measures of inflation compensation remain low; ~~most~~ survey-based measures of longer-term inflation expectations are little changed, on balance.
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~~ stabilize around 2 percent over the medium term. 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 ~~maintain~~ raise the target range for the federal funds rate ~~at 1/2 to 3/4 percent~~ to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained 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 will carefully monitor actual and expected inflation developments relative to its symmetric 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; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; ~~Neel Kashkari;~~ Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.
| Removed | Added | Significance |
|---|---|---|
| "maintain... 1/2 to 3/4%" | "raise... to 3/4 to 1%" | Direct Policy Action: Transition from hold to hike. |
| "investment has remained soft" | "investment... firmed somewhat" | Growth: Upgrade in business sector confidence/spending. |
| "still below... 2 percent" | "moving close to... 2 percent" | Inflation: Recognition that the inflation gap is closing. |
| "rise to 2 percent" | "stabilize around 2 percent" | Inflation: Shift from "chasing" a target to "maintaining" it. |
| "In light of the current shortfall..." | "...relative to its symmetric inflation goal" | Guidance: Removal of "shortfall" language; shift to "symmetric" target. |
| "warrant only gradual increases" | "warrant gradual increases" | Forward Guidance: Removal of "only" subtly increases the pace/conviction. |
There is a profound shift in the characterization of inflation. The February statement focused on the "shortfall" and the need for inflation to "rise to" 2%. By March, the Committee acknowledges inflation is "moving close to" the target. The introduction of the term "symmetric inflation goal" is a critical strategic pivot; it signals that the Fed is less concerned about inflation being slightly below 2% than it is about the volatility of the path, moving away from a one-sided "shortfall" mentality.
The assessment of the real economy has moved from "moderate/soft" to "moderate/firming." While labor market language remains relatively stable (continuing to strengthen), the upgrade of business fixed investment from "soft" to "firmed somewhat" provides the fundamental justification for the rate hike, suggesting the economy can absorb higher borrowing costs.
The guidance has become more assertive. The removal of the word "only" before "gradual increases" is a classic "central bank speak" nuance—it removes a qualifier that previously served to dampen market expectations of the pace of hikes. Furthermore, the shift from "progress toward" a goal to monitoring "developments relative to" a goal suggests the Fed now feels it is in the "maintenance" phase rather than the "recovery" phase.
Verdict: Hawkish
The Committee has shifted decisively in a hawkish direction. This is not merely due to the 25 basis point rate increase, but the accompanying textual upgrades. By removing the "shortfall" language, upgrading the outlook for business investment, and deleting the limiting word "only" from its forward guidance on rate hikes, the FOMC has signaled increased confidence in the economic trajectory. The presence of a dissenter (Kashkari) who preferred to hold suggests that the majority of the Committee is now more concerned with preventing overheating/normalization than with stimulating a lagging recovery.