As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from March 20, 2019, and May 1, 2019.
Information received since the Federal Open Market Committee met in ~~January~~ March indicates that the labor market remains strong ~~but that growth of economic activity has slowed from its solid rate in the fourth quarter~~ and that economic activity rose at a solid rate. ~~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. ~~Recent indicators point to~~ Growth of household spending and business fixed investment slowed in the first quarter. On a 12-month basis, overall inflation ~~has declined, largely as a result of lower energy prices; inflation for items other than food and energy remains near 2 percent~~ and inflation for items other than food and energy have declined and are running below 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, 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~~ Chair; John C. Williams, Vice ~~Chairman~~ Chair; 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~~ May 1, 2019
| Removed | Added | Significance |
|---|---|---|
| "...growth of economic activity has slowed from its solid rate..." | "...economic activity rose at a solid rate." | Positive Growth Pivot: Shifts from a narrative of deceleration to one of steady growth. |
| "Payroll employment was little changed in February..." | (Removed specific monthly weakness) | Smoothing Data: Removes a specific negative data point to emphasize the "average" solid gain. |
| "...inflation for items other than food and energy remains near 2 percent." | "...[core inflation] have declined and are running below 2 percent." | Inflation Warning: A critical admission that core inflation is now undershooting the target. |
| "largely as a result of lower energy prices" | (Removed attribution to energy) | Broadening Weakness: Suggests inflation weakness is no longer just a volatile energy story, but systemic. |
Inflation
There is a significant and concerning shift in the characterization of inflation. In March, the Committee viewed core inflation as "near 2 percent" and attributed overall declines to energy prices. By May, the Committee explicitly states that both headline and core inflation have declined and are "running below 2 percent." This signals that the "muted inflation pressures" mentioned later in the text are becoming more entrenched.
Labor Markets & Growth
The Committee has upgraded its view of economic growth. The March statement highlighted a slowdown from the fourth quarter; the May statement describes activity as having "rose at a solid rate." By removing the specific mention of the weak February payrolls report, the Committee is presenting a more robust, smoothed-over picture of the labor market.
Forward Guidance
The forward guidance remains identical. The "patient" language and the framework for assessing future adjustments have not changed. This suggests that while the data (growth up, inflation down) is moving in opposite directions, the Committee is not yet ready to commit to a specific policy path (e.g., a rate cut), preferring to maintain flexibility.
The Committee has shifted Dovish, despite the more optimistic language regarding GDP growth. While the "solid rate" of economic activity is a hawkish signal, it is heavily outweighed by the admission that core inflation is now running below the 2% target. In central banking, a breach of the inflation target is a primary catalyst for easing. By acknowledging that core inflation is undershooting, the Committee is laying the intellectual groundwork for future rate cuts to stimulate price growth, even as the economy remains nominally "solid."