As a senior economist and central bank strategist, I have conducted a comparative analysis of the July 26 and September 20, 2017, FOMC statements. This period is particularly notable for the intersection of a tightening cycle and significant exogenous shocks (Hurricanes Harvey, Irma, and Maria).
Information received since the Federal Open Market Committee met in ~~June~~ July indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have ~~been solid, on average, since the beginning of the year~~ remained solid in recent months, and the unemployment rate has ~~declined~~ stayed low. Household spending ~~and business fixed investment have continued to expand~~ has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined ~~and~~ this year 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. Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, 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. Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily; apart from that effect, 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 maintain the target range for the federal funds rate 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 expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated; this program is described in the June 2017 Addendum to the Committee's Policy Normalization Principles and Plans.~~ In October, the Committee will initiate the balance sheet normalization program 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; Neel Kashkari; and Jerome H. Powell.
Implementation Note issued September 20, 2017
| Removed | Added | Significance |
|---|---|---|
| "been solid, on average, since the beginning of the year" | "remained solid in recent months" | Shifts focus from a yearly average to recent momentum (more current). |
| "unemployment rate has declined" | "unemployment rate has stayed low" | Transition from a trend of improvement to a state of stability/tightness. |
| "continued to expand" (General) | "picked up in recent quarters" (Fixed Investment) | Specific upgrade to the strength of business investment. |
| General balance sheet "expectations" | "In October, the Committee will initiate..." | High. Moves from vague guidance to a hard date for Quantitative Tightening (QT). |
| (N/A) | Hurricane-related commentary | Acknowledges exogenous shocks; clarifies they are "temporary" and "non-material" to the medium term. |
The Committee maintains its view that inflation is running below the 2% target. However, there is a critical nuance added regarding the hurricanes. By explicitly stating that gasoline prices will "boost inflation temporarily," the Fed is preemptively signaling that any upcoming spike in CPI is noise, not a trend. This prevents the market from misinterpreting a temporary price jump as a signal for an aggressive rate hike.
The language has shifted from "improvement" to "stability." While the July statement noted the unemployment rate had "declined," the September statement notes it has "stayed low." This suggests the Committee believes the labor market has reached a plateau of strength. Furthermore, the specific mention that business investment has "picked up" suggests a strengthening of the underlying economic engine.
The most significant shift is in the balance sheet guidance. The Committee moved from "expecting to begin... relatively soon" to a definitive commitment: "In October, the Committee will initiate." This removes ambiguity and provides the market with a concrete timeline for the reduction of the Fed's asset holdings.
The overall tone is Neutral to Slightly Hawkish.
While the Committee maintained the federal funds rate and acknowledged the devastation of the hurricanes, the "Hawkish" elements outweigh the "Dovish" ones. Specifically, the upgrade in business investment language and the transition of the balance sheet normalization from a "possibility" to a "scheduled event" in October signal a commitment to tightening financial conditions. The hurricane commentary serves as a "neutralizer," ensuring that temporary volatility does not derail the broader trajectory of gradual normalization.