As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from January 30 and March 20, 2019. This period represents a critical pivot in the Committee's perception of the economic cycle.
Information received since the Federal Open Market Committee met in ~~December~~ January indicates that the labor market ~~has continued to strengthen~~ remains strong but that growth of economic activity ~~has been rising at a solid rate~~ has slowed from its solid rate in the fourth quarter. ~~Job gains have been strong, on average, in recent months, and the unemployment rate has remained low.~~ Payroll employment was little changed in February, but job gains have been solid, on average, in recent months, and the unemployment rate has remained low. ~~Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier last year.~~ Recent indicators point to slower growth of household spending and business fixed investment in the first quarter. On a 12-month basis, ~~both~~ overall inflation ~~and inflation for items other than food and energy remain near 2 percent~~ has declined, largely as a result of lower energy prices; inflation for items other than food and energy remains near 2 percent. ~~Although~~ market-based measures of inflation compensation ~~have moved lower~~ have remained low in recent months, ~~survey-based measures of longer-term inflation expectations are little changed.~~ and survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.
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; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.
Implementation Note issued March 20, 2019
| Removed | Added | Significance |
|---|---|---|
| "has continued to strengthen" | "remains strong" | Shift from an active trend of improvement to a static state of strength. |
| "rising at a solid rate" | "slowed from its solid rate" | Explicit admission of a deceleration in GDP growth. |
| "Household spending... grow strongly" | "slower growth of household spending and business fixed investment" | Broadening the slowdown from just investment to consumption. |
| "both overall inflation... remain near 2%" | "overall inflation has declined... lower energy prices" | Acknowledgment of disinflationary pressure in headline CPI. |
| "have moved lower" | "have remained low" | Shift from a trend of decline to a persistent low-inflation environment. |
Inflation
The Committee has shifted from a neutral observation that inflation is "near 2 percent" to an explicit acknowledgment that headline inflation "has declined." By attributing this to energy prices, the Fed is attempting to signal that the decline is exogenous rather than a sign of systemic collapse in demand. However, the change from "moved lower" to "remained low" regarding market-based measures suggests the Committee is becoming more concerned about the persistence of low inflation.
Labor Markets & Growth
This is the most aggressive shift in the statement. The narrative has moved from "strengthening" and "rising at a solid rate" to "remains strong" and "has slowed." The specific mention of February payrolls being "little changed" is a significant inclusion of a negative data point, signaling that the Committee is now closely monitoring the risk of a labor market peak.
Forward Guidance
Interestingly, the second and third paragraphs—containing the actual policy decision and the "patient" guidance—remain identical. This creates a tension in the statement: the "Information" section (the why) has become significantly more pessimistic, but the "Action" section (the what) remains unchanged. This suggests the Committee is in a "wait-and-see" mode, acknowledging headwinds but not yet ready to commit to a pivot (cut).
The Committee has shifted decidedly Dovish. While the federal funds rate remained unchanged and the "patient" language was preserved, the descriptive text regarding the economy was downgraded across every major metric: GDP growth, household spending, business investment, and headline inflation. By replacing words of momentum ("strengthen," "rising") with words of deceleration ("slowed," "declined"), the Fed is preparing the markets for the possibility that the tightening cycle is over and that future moves may be biased toward the downside to support growth.