As a senior economist and central bank strategist, I have performed a comparative analysis of the November 1 and December 13, 2017, FOMC statements. This period represents a critical transition in the normalization cycle.
Information received since the Federal Open Market Committee met in ~~September~~ November indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate ~~despite hurricane-related disruptions~~. Averaging through hurricane-related fluctuations, job gains have been solid, and 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, both ~~inflation measures~~ overall inflation and inflation for items other than food and energy 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. Hurricane-related disruptions and rebuilding ~~will continue to affect~~ have affected economic activity, employment, and inflation ~~in the near term, but past experience suggests that the storms are unlikely to materially alter~~ in recent months but have not materially altered the ~~course of the~~ outlook for the national economy. 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~~ remain strong. 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~~ raise the target range for the federal funds rate to 1-1/4 to 1-1/2 percent. The stance of monetary policy remains accommodative, thereby supporting ~~some further strengthening in~~ strong 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 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;~~ Patrick Harker; Robert S. Kaplan; ~~Neel Kashkari;~~ Jerome H. Powell; and Randal K. Quarles. Voting against the action were Charles L. Evans and Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.
Implementation Note issued December 13, 2017
| Removed | Added | Significance |
|---|---|---|
| "maintain the target range... 1 to 1-1/4%" | "raise the target range... 1-1/4 to 1-1/2%" | Primary Action: A 25bps rate hike, signaling a move toward normalization. |
| "strengthen somewhat further" | "remain strong" | Labor Market: Shift from expecting growth to acknowledging attained strength. |
| "will continue to affect... unlikely to materially alter" | "have affected... have not materially altered" | Risk Assessment: Hurricanes are now viewed as a past event rather than a future risk. |
| "some further strengthening in" | "strong" | Policy Stance: The Fed no longer feels the need to "push" the labor market; it is now "supporting" a strong one. |
| Unanimous voting list | Dissenting votes (Evans, Kashkari) | Internal Divide: Signals a growing "dovish" minority concerned about the pace of hikes. |
| Balance sheet normalization sentence | (Removed) | Communication: Likely moved to other reporting or deemed redundant for this specific statement. |
The Committee remains cautious. The removal of the specific mention of gasoline price spikes suggests the "noise" from the hurricanes has faded. However, the explicit mention that both overall and core inflation are running below 2% reinforces that the Fed is not seeing a rapid acceleration in prices, which provides the "room" to raise rates without risking a premature choke-off of growth.
There is a subtle but critical linguistic shift here. In November, the Fed expected labor conditions to "strengthen somewhat further." By December, they describe conditions as "strong" and expect them to "remain strong." This indicates the Committee believes the labor market has reached a plateau of strength, reducing the urgency to keep rates low to stimulate employment.
The boilerplate language regarding "gradual increases" and "data-dependency" remains identical. This suggests that while the Committee was ready to act in December, they are not yet ready to commit to a specific accelerated path. They are maintaining a "steady hand" approach.
The Committee shifted Hawkish.
The primary driver is the actual policy action: raising the federal funds rate by 25 basis points. This is supported by the linguistic shift in the labor market description—moving from a desire to further strengthen the market to a recognition that the market is already strong. By framing the labor market as having arrived at a state of strength, the Fed justifies the rate hike. However, the presence of two dissenting votes (Evans and Kashkari) introduces a "dovish" counter-narrative, suggesting that the consensus for further hikes is not absolute.