As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from June 14 and July 26, 2017.
Information received since the Federal Open Market Committee met in ~~May~~ June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains ~~have moderated but~~ have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending ~~has picked up in recent months, and~~ and business fixed investment have continued to expand. On a 12-month basis, ~~inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 percent~~ overall inflation and the measure excluding food and energy prices have declined and are running 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 continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, 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.
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 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.
For the time being, 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. The Committee ~~currently~~ expects to begin implementing ~~a~~ its balance sheet normalization program ~~this year~~ relatively soon, 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~~; this program is described in the June 2017 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; ~~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.~~ Neel Kashkari; and Jerome H. Powell.
Implementation Note issued July 26, 2017
| Removed | Added | Significance |
|---|---|---|
| "have moderated but" | (Removed) | Shifts labor market description from "moderating but solid" to simply "solid," suggesting stronger momentum. |
| "running somewhat below 2 percent" | "running below 2 percent" | Removal of "somewhat" is a subtle but important linguistic shift, acknowledging a more pronounced inflation deficit. |
| "raise... to" | "maintain... at" | The primary policy action: a shift from a hiking cycle to a pause. |
| "this year" | "relatively soon" | Increases the immediacy of Balance Sheet normalization (QT), offsetting the pause in rate hikes. |
| Neel Kashkari (Voting against) | Neel Kashkari (Voting for) | Indicates a shift toward full Committee consensus on the policy path. |
Inflation:
There is a noticeable shift toward a more concerned tone regarding inflation. By removing the qualifier "somewhat" and explicitly stating that both overall and core inflation "have declined," the Committee is acknowledging that price pressures are weaker than previously characterized. This provides the fundamental justification for the decision to hold rates steady.
Labor Markets & Growth:
The characterization of the labor market has actually become more positive. The removal of the phrase "have moderated" regarding job gains suggests the Committee views the employment side of the mandate as robust. The consolidation of household spending and business investment into a single phrase of "continued to expand" suggests a steady, if not accelerating, growth trajectory.
Forward Guidance:
The forward guidance remains remarkably stable. The Committee kept the language regarding "gradual increases" and the "actual path... depend[ing] on the economic outlook." This indicates that while they paused in July, they have not abandoned the hiking cycle; they are simply pausing to allow inflation data to catch up.
The Committee shifted Dovish in the immediate term, but remained Neutral/Hawkish in its long-term trajectory. The decision to "maintain" rather than "raise" the federal funds rate is a classic dovish move, triggered by the admission that inflation is running "below 2 percent" (dropping the "somewhat"). However, this dovishness is partially offset by two factors: the more aggressive timeline for balance sheet normalization ("relatively soon") and the achievement of full consensus (Kashkari moving from a "no" to a "yes"). Overall, the statement reflects a "wait-and-see" approach—pausing the rate hikes while keeping the door open for future increases.