As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from June 13, 2018, and August 1, 2018.
Information received since the Federal Open Market Committee met in ~~May~~ June indicates that the labor market has continued to strengthen and that economic activity has been rising at a ~~solid~~ strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has ~~declined~~ stayed low. ~~Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly.~~ Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy ~~have moved close to~~ remain near 2 percent. 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 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 ~~raise the target range for the federal funds rate to~~ maintain the target range for the federal funds rate at 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 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.
Voting for the FOMC monetary policy action were~~:~~ Jerome H. Powell, Chairman; ~~William C. Dudley, Vice Chairman~~ John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Esther L. George; Loretta J. Mester; and Randal K. Quarles.
Implementation Note issued August 1, 2018
| Removed | Added | Significance |
|---|---|---|
| "solid rate" | "strong rate" | Upgrades the description of economic growth, suggesting higher confidence in momentum. |
| "declined" (unemployment) | "stayed low" | Shifts from a trend of improvement to a state of stability/plateau. |
| "growth... has picked up" | "have grown strongly" | Simplifies and strengthens the characterization of spending and investment. |
| "have moved close to" | "remain near" | Indicates that inflation has stabilized at the target rather than still trending toward it. |
| "raise... to" | "maintain... at" | The primary policy action: a pause in the hiking cycle. |
| William C. Dudley | John C. Williams (VC) | Administrative change in leadership/voting membership. |
Inflation
The shift from "moved close to" to "remain near" is a subtle but critical linguistic pivot. It suggests the Committee now views inflation as having reached a steady state around the 2% target, rather than being in a state of transition. This provides the Committee with a more stable anchor to justify future policy moves.
Labor Markets & Growth
The Committee has upgraded its assessment of the real economy. Changing "solid" to "strong" regarding economic activity, and consolidating the description of spending and investment into a definitive "grown strongly," indicates a perception of an economy operating at or near full capacity. The change in unemployment language from "declined" to "stayed low" suggests the labor market has reached a floor.
Forward Guidance
The forward guidance remains remarkably consistent. The phrase "further gradual increases" is preserved, signaling that the long-term trajectory remains upward. However, the immediate action shifted from a rate hike to a maintenance (pause). The data-dependency language remains identical, indicating that while the current move is a pause, the framework for future hikes has not changed.
The Committee has shifted Hawkishly in its assessment but Dovishly in its action.
This is a "hawkish pause." While the Committee decided to maintain rates (a dovish action), it simultaneously upgraded the description of the economy from "solid" to "strong" and noted that inflation "remains" near target. By strengthening the economic backdrop in the text, the FOMC is building the fundamental justification for the "further gradual increases" mentioned in the second paragraph. They are signaling that the economy is robust enough to handle higher rates in the future, even if they are pausing in the immediate term.