As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from May 2 and June 13, 2018. This transition represents a critical pivot from a "hold" posture to an active tightening cycle.
Information received since the Federal Open Market Committee met in ~~March~~ May indicates that the labor market has continued to strengthen and that economic activity has been rising at a ~~moderate~~ solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has ~~stayed low~~ declined. Recent data suggest that growth of household spending ~~moderated from its strong fourth-quarter pace~~ has picked up, while business fixed investment ~~continued~~ has continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. ~~Market-based measures of inflation compensation remain low; survey-based~~ Indicators 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 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 run near the Committee's symmetric 2 percent objective over the medium term.~~ The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.
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 1-1/2 to 1-3/4 percent~~ to 1-3/4 to 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~~ maximum employment objective and its symmetric 2 percent inflation objective. 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.~~
Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.
Implementation Note issued June 13, 2018
| Removed | Added | Significance |
|---|---|---|
| "moderate rate" / "stayed low" / "moderated" | "solid rate" / "declined" / "picked up" | Bullish Economic Outlook: Upgrading growth descriptors signals the economy is heating up, justifying a rate hike. |
| "maintain the target range" | "raise the target range" | Policy Action: Direct shift from a pause to an active tightening of monetary policy. |
| Detailed guidance on "further gradual increases" and "longer run" levels | (Condensed into the "consistent with" sentence) | Reduced Forward Guidance: The Fed is removing specific promises about the future path, increasing flexibility/data-dependency. |
| "Market-based measures... remain low" | "Indicators of..." | Simplification: Removing the specific mention of low market-based inflation measures removes a "dovish" data point from the text. |
Inflation
The Committee maintains that inflation is "close to 2 percent," but the phrasing has become more streamlined. By removing the specific mention that "market-based measures... remain low," the Fed is scrubbing a piece of evidence that previously suggested inflation was under-shooting. This suggests the Committee is less concerned about undershooting and more focused on the trajectory toward the target.
Labor Markets & Growth
There is a clear upgrade in the economic assessment. The shift from "moderate" to "solid" growth and the change from the unemployment rate having "stayed low" to having "declined" indicates a tightening labor market. Furthermore, the admission that household spending has "picked up" (reversing the previous "moderated" trend) provides the fundamental justification for the rate increase.
Forward Guidance
The most significant structural change is the removal of the final paragraph's detailed guidance. The previous statement explicitly stated that the rate would likely remain "below levels that are expected to prevail in the longer run." By deleting this and the explicit expectation of "further gradual increases," the Committee is reducing its commitment to a specific path, thereby increasing its agility to react to incoming data.
The Committee has shifted decisively Hawkish. This is not merely due to the 25-basis-point rate hike, but the accompanying linguistic upgrades. By characterizing growth as "solid" rather than "moderate" and noting that spending has "picked up," the Fed is signaling that the economy is operating at or near capacity. The removal of the "low" market-based inflation references and the deletion of the "below longer-run levels" guidance further indicate a move away from accommodative signaling toward a regime of normalization.