As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from March 21, 2018, and May 2, 2018.
Information received since the Federal Open Market Committee met in ~~January~~ March indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong~~ in recent months~~, on average, 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~~ moderated from its strong fourth-quarter pace, while business fixed investment continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have ~~continued to run below~~ moved close to 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 in coming months and to stabilize around~~ run near the Committee's symmetric 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~~ maintain the target range for the federal funds rate ~~to~~ at 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 |
|---|---|---|
| "continued to run below 2 percent" | "moved close to 2 percent" | Bullish/Hawkish: Inflation is finally approaching the target. |
| "business fixed investment have moderated" | "business fixed investment continued to grow strongly" | Bullish: Stronger capital expenditure suggests higher growth potential. |
| "move up... and stabilize around" | "run near the Committee's symmetric" | Confidence: Shift from "hoping" for a move up to "expecting" it to stay near target. |
| "raise the target range" | "maintain the target range" | Action: A pause in the hiking cycle for this specific meeting. |
| "monitoring inflation developments closely" | (Removed) | Tonal: Reduced urgency/alarm regarding inflation volatility. |
Inflation
There is a notable shift in the characterization of inflation. In March, the Committee noted inflation was "below 2 percent" and expected it to "move up." By May, the language shifted to "moved close to 2 percent" and is expected to "run near" the objective. This indicates the Committee believes inflation is finally normalizing, reducing the "undershooting" anxiety present in the previous statement.
Labor Markets & Growth
The assessment of growth has become more nuanced and slightly more optimistic. While household spending is noted as having moderated, the Committee explicitly highlighted that business fixed investment "continued to grow strongly." This suggests a shift in the engine of growth from consumption to investment, which is generally viewed as more sustainable for long-term productivity.
Forward Guidance
The forward guidance remains remarkably stable. The "boilerplate" language regarding "further gradual increases" and the "actual path... depend on the economic outlook" remains unchanged. This signals that while the Committee paused rates in May, the overarching trajectory remains upward.
The Committee shifted Neutral to Slightly Hawkish.
While the immediate action was a pause (Dovish), the underlying economic assessment became more Hawkish. The Committee upgraded its view of inflation (from "below" to "close to" 2%) and upgraded its view of business investment (from "moderated" to "growing strongly"). By removing the phrase "monitoring inflation developments closely," the Fed signaled a transition from a state of concern/uncertainty to a state of confidence that the economy is heating up as intended. The pause in rates appears to be a "breather" rather than a pivot, as the long-term guidance for further increases remained untouched.