As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from January 31 and March 21, 2018. This period represents a critical transition in the Fed's normalization cycle.
Information received since the Federal Open Market Committee met in ~~December~~ January indicates that the labor market has continued to strengthen and that economic activity has been rising at a ~~solid~~ moderate rate. ~~Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low.~~ Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation 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. The economic outlook has strengthened in recent months. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up ~~this year~~ in coming months 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 ~~maintain~~ raise the target range for the federal funds rate ~~at 1-1/4 to 1-1/2 percent~~ to 1-1/2 to 1-3/4 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 |
|---|---|---|
| "rising at a solid rate" | "rising at a moderate rate" | Downgrading the current pace of GDP growth. |
| "Gains in... investment have been solid" | "growth rates... have moderated from... fourth-quarter" | Explicit acknowledgment of a cooling in spending/investment. |
| (None) | "The economic outlook has strengthened" | Offsets the "moderate" growth comment; suggests long-term confidence. |
| "move up this year" | "move up in coming months" | Accelerating the expected timeline for inflation to rise. |
| "maintain... 1-1/4 to 1-1/2%" | "raise... to 1-1/2 to 1-3/4%" | The primary action: A 25bps rate hike. |
Inflation
The Committee has shifted from a broad annual expectation ("this year") to a more immediate expectation ("in coming months"). This suggests the Committee is seeing more immediate evidence of price pressures or is becoming more confident that the 2% target is within reach sooner than previously anticipated.
Labor Markets & Growth
There is a nuanced "decoupling" here. The Committee is downgrading the current pace of economic activity (changing "solid" to "moderate" and noting a moderation in spending/investment). However, they simultaneously state that the "economic outlook has strengthened." This indicates that while the immediate quarter may be softer, the underlying trend is robust enough to support tighter policy.
Forward Guidance
The forward guidance remains remarkably stable. The language regarding "further gradual increases" and the "actual path... depend[ing] on the economic outlook" is unchanged. This suggests that while the Committee is raising rates now, they are not yet ready to accelerate the pace of future hikes beyond the "gradual" path.
The Committee has shifted Hawkish.
Despite the slight softening of language regarding current GDP growth (moving from "solid" to "moderate"), the overall tone is decisively hawkish because the Committee actually raised the federal funds rate. Furthermore, the acceleration of the inflation timeline ("in coming months" vs "this year") and the statement that the "economic outlook has strengthened" provide the fundamental justification for the hike. The Fed is signaling that the economy is strong enough to withstand higher borrowing costs, even if some specific components of growth are moderating.