As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from September 20 and November 1, 2017.
Information received since the Federal Open Market Committee met in ~~July~~ September indicates that the labor market has continued to strengthen and that economic activity has been rising ~~moderately so far this year~~ at a solid rate despite hurricane-related disruptions. Although the hurricanes caused a drop in payroll employment in September, the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September; however, inflation for items other than food and energy remained soft. On a 12-month basis, ~~overall inflation and the measure excluding food and energy prices~~ both inflation measures have declined 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.~~ Hurricane-related disruptions and rebuilding will ~~affect~~ continue to affect economic activity ~~in the near term~~, employment, and inflation 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.
~~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.~~ The balance sheet normalization program initiated in October 2017 is proceeding.
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; and Randal K. Quarles.
| Removed | Added | Significance |
|---|---|---|
| "rising moderately" | "rising at a solid rate" | Upgrades the characterization of GDP growth, suggesting stronger underlying momentum. |
| "Hurricanes... devastated many communities" | "Hurricane-related disruptions... continue to affect" | Shifts from a humanitarian tone to a technical economic assessment of the storms. |
| "Higher prices... will likely boost inflation temporarily" | "inflation for items other than food and energy remained soft" | Moves from predicting a temporary spike to acknowledging that core inflation remains stubbornly low. |
| "will initiate the balance sheet normalization" | "normalization program... is proceeding" | Confirms the transition from planning to execution of Quantitative Tightening (QT). |
Inflation
The Committee has moved from a predictive stance (warning that hurricanes will boost inflation) to an observational stance (noting that gasoline did boost inflation, but core inflation remained soft). The emphasis on "soft" core inflation suggests that the Committee is concerned that the 2% target remains elusive, despite the headline noise caused by energy prices.
Labor Markets & Growth
There is a notable upgrade in the description of economic activity, moving from "moderately" to a "solid rate." The Committee is explicitly decoupling the long-term trend from short-term volatility, noting that while payrolls dropped in September due to storms, the unemployment rate continued to decline. This indicates a high level of confidence in the resilience of the labor market.
Forward Guidance
The forward guidance remains virtually identical. The commitment to "gradual increases" and the "data-dependent" path are unchanged. However, the confirmation that balance sheet normalization "is proceeding" adds a tightening element to the overall policy mix, even as the federal funds rate remained on hold.
The Committee remained Neutral to Slightly Hawkish. While the federal funds rate was maintained, the upgrade of economic growth from "moderate" to "solid" provides a stronger justification for future rate hikes. The shift in tone regarding the hurricanes—moving from a sympathetic description of devastation to a clinical analysis of "disruptions"—suggests the Committee is less concerned about the storms acting as a drag on the economy. Combined with the confirmation that balance sheet normalization is now active, the overall policy trajectory continues to lean toward tightening, despite the admission that core inflation remains "soft."