As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from December 13, 2017, and January 31, 2018.
Information received since the Federal Open Market Committee met in ~~November~~ December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. ~~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.~~ Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy have ~~declined this year and are running~~ continued to run below 2 percent. Market-based measures of inflation compensation ~~remain low~~ have increased in recent months but 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 have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy. Consequently,~~ the Committee ~~continues to~~ expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12-month basis is expected to ~~remain somewhat below 2 percent in the near term but~~ move up this year and 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 the target range for the federal funds rate to~~ maintain the target range for the federal funds rate at 1-1/4 to 1-1/2 percent. The stance of monetary policy remains accommodative, thereby supporting 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 further 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.
| Removed | Added | Significance |
|---|---|---|
| "Averaging through hurricane-related fluctuations..." | "Gains in employment, household spending, and business fixed investment have been solid..." | Normalization: The Committee is moving past the "hurricane noise" and confirming a broad-based, solid economic expansion. |
| "declined this year and are running" | "continued to run" | Stability: Shifts from a narrative of falling inflation to one of persistently low inflation. |
| "remain low" (Market-based measures) | "have increased in recent months but remain low" | Hawkish Signal: Acknowledges a rise in market-based inflation expectations, suggesting a tightening of financial conditions. |
| "remain somewhat below 2 percent in the near term" | "move up this year" | Bullish on Inflation: Explicitly forecasts an upward trajectory for inflation in the current calendar year. |
| "raise the target range... to" | "maintain the target range... at" | Pause: A tactical hold on rates, though the underlying bias remains tightening. |
| "gradual adjustments" | "further gradual adjustments" | Commitment: The word "further" signals that the hiking cycle is not over; the pause is temporary. |
There is a notable shift in the inflation narrative. In December, the Committee was focused on the fact that inflation had "declined." By January, the language shifted to inflation "continuing to run" below target, but with a critical new addition: the expectation that inflation will "move up this year." Furthermore, the admission that market-based inflation measures have "increased in recent months" suggests the Committee is seeing the first signs of the inflation "take-off" they have been seeking.
The Committee has moved from a "recovery/rebuilding" phase to a "solid growth" phase. The removal of references to hurricane-related disruptions indicates that the Committee no longer views external shocks as a primary driver of volatility. The description of employment, spending, and investment as "solid" (rather than "moderate" or "picking up") suggests a higher level of confidence in the economy's internal momentum.
While the Committee opted to "maintain" the rate (a pause), the forward guidance became more explicit regarding the trajectory. The insertion of the word "further" in both the policy stance and the expected path of the federal funds rate serves as a "bridge" to future hikes. It signals to the markets that the pause is a calibration, not a pivot.
Overall Tone: Mildly Hawkish.
Despite the decision to maintain the target range (which is nominally neutral/dovish), the underlying text is decidedly hawkish. The Committee has scrubbed the "hurricane" excuses from the text, upgraded the description of economic growth to "solid," and—most importantly—changed its inflation forecast from "remaining below 2 percent" to "moving up this year." By adding the word "further" to its guidance on rate increases, the FOMC is signaling that the path toward normalization remains intact and that the current pause is merely a momentary breath before the next leg of the tightening cycle.