As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from May 3 and June 14, 2017. This transition marks a pivotal moment in the 2017 tightening cycle, characterized by a rate hike and the formal introduction of balance sheet runoff plans.
Information received since the Federal Open Market Committee met in ~~March~~ May indicates that the labor market has continued to strengthen ~~even as growth in economic activity slowed~~ and that economic activity has been rising moderately so far this year. Job gains ~~were~~ have moderated but have been solid, on average, ~~in recent months~~ since the beginning of the year, and the unemployment rate ~~declined~~ has declined. Household spending ~~rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid~~ has picked up in recent months, and business fixed investment ~~firmed~~ has continued to expand. ~~Inflation measured~~ On a 12-month basis, inflation ~~recently has been running close to the Committee's 2 percent longer-run objective. Excluding energy and food, consumer prices declined in March and inflation continued to run~~ has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 percent. Market-based measures of inflation compensation remain low; 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 views the slowing in growth during the first quarter as likely to be transitory and~~ The Committee continues to expect 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 stabilize around 2 percent over the medium term~~ and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced~~,~~ but the Committee is monitoring inflation developments closely. ~~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 3/4 to 1~~ to 1 to 1-1/4 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. 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 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~~. The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated. This program, which would gradually reduce the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from those securities, is described in the accompanying addendum to the Committee's Policy Normalization Principles and Plans.
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;~~ and Jerome H. Powell. 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 |
|---|---|---|
| "growth in economic activity slowed" | "economic activity has been rising moderately" | Shift from concern over Q1 slowdown to confidence in current growth. |
| "maintain the target range" | "raise the target range" | Direct policy action: 25bps rate hike. |
| "anticipates [reinvesting] until normalization... is well under way" | "expects to begin implementing a balance sheet normalization program this year" | Pivot from passive reinvestment to active balance sheet reduction (Quantitative Tightening). |
| "inflation... running close to... 2 percent" | "inflation has declined recently... running somewhat below 2 percent" | Admission of softening price pressures. |
| Unanimous vote | Dissent by Neel Kashkari | Indicates emerging internal divide regarding the pace of tightening. |
There is a notable downward revision in the characterization of inflation. In May, inflation was "close to" the 2% objective. By June, the Committee explicitly states that inflation "has declined recently" and is "running somewhat below 2 percent." Crucially, the Committee has decoupled its outlook: it now expects inflation to remain below target in the near term, while maintaining the medium-term goal of 2%. This suggests a growing concern that inflation is not keeping pace with the tightening cycle.
The tone regarding growth has shifted from defensive to confident. The May statement focused on a "slowing in growth during the first quarter" as "transitory." The June statement removes this anxiety entirely, noting that activity has been "rising moderately." While job gains are described as having "moderated," the overall assessment of the labor market remains robust, providing the "green light" for the rate hike despite the inflation softness.
The guidance on the federal funds rate remains "gradual," but the Balance Sheet guidance has undergone a regime shift. The Committee moved from a vague timeline ("until normalization... is well under way") to a specific window ("this year"). This signals that the Fed is moving toward a full "normalization" of both the price of money (rates) and the quantity of money (balance sheet).
The Committee shifted Hawkish, though with a caveat of internal friction. The primary drivers are the 25 basis point rate increase and the explicit commitment to begin balance sheet normalization (QT) this year. These are the two most aggressive tools in the central bank's arsenal. However, the "Hawkish" tilt is tempered by the admission that inflation is running below target and the presence of a formal dissent (Kashkari), suggesting that the Committee is pushing forward with normalization based on labor market strength and growth, even as price signals remain weak.