As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from November 8 and December 19, 2018. This period represents a critical juncture in the "normalization" cycle of the late 2010s.
Information received since the Federal Open Market Committee met in ~~September~~ November indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has ~~declined~~ remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy 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~~ judges that some 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.~~ The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.
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 2 to 2-1/4 percent~~ to 2-1/4 to 2-1/2 percent.
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; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Loretta J. Mester; and Randal K. Quarles.
Implementation Note issued ~~November 8, 2018~~ December 19, 2018
| Removed | Added | Significance |
|---|---|---|
| "declined" (re: unemployment) | "remained low" | Neutral/Cooling: Shifts from a trend of improvement to a state of stability; suggests the labor market may be peaking. |
| "expects" | "judges that some" | Dovish Pivot: "Expects" is a projection; "judges" is an assessment. Adding "some" limits the perceived scope of future hikes. |
| "Risks... appear roughly balanced" | "...but will continue to monitor global economic and financial developments" | Cautionary: Introduces explicit concern regarding external shocks/global volatility. |
| "maintain... 2 to 2-1/4%" | "raise... 2-1/4 to 2-1/2%" | Hawkish Action: An actual 25bps rate hike was implemented. |
Inflation
There is no change in the characterization of inflation. Both statements maintain that inflation remains "near 2 percent" and that long-term expectations are "little changed." The Committee remains confident that inflation is anchored, providing them the room to raise rates without immediate fear of a price spiral.
Labor Markets & Growth
A subtle but important shift occurred in the description of the unemployment rate. Moving from "has declined" (active improvement) to "has remained low" (plateau) suggests the Committee recognizes that the labor market is reaching a ceiling. This indicates a transition from a "recovery" mindset to a "maintenance" mindset.
Forward Guidance
This is the most significant area of shift. The change from "expects further gradual increases" to "judges that some further gradual increases" is a classic central bank linguistic pivot. By inserting the word "some," the Committee is signaling that the hiking cycle is nearing its end and that the number of remaining increases is limited. Furthermore, the new language regarding "global economic and financial developments" signals an increased sensitivity to external risks (likely referring to trade tensions or global growth slowdowns).
The Committee's tone is Mixed, but leaning Dovish in its guidance. While the actual policy action was Hawkish (a 25bps rate hike), the accompanying language was designed to manage market expectations by signaling a slowing pace of tightening. The shift from "expects" to "judges that some" and the new emphasis on monitoring global risks suggest the Fed is becoming more cautious. In essence, the Fed delivered a rate hike but simultaneously signaled that the "endpoint" of the tightening cycle is now in sight.