As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from June 19 and July 31, 2019. This period represents a critical pivot in the "insurance cut" cycle of 2019.
Information received since the Federal Open Market Committee met in ~~May~~ June indicates that the labor market remains strong and that economic activity ~~is~~ has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending ~~appears to have~~ has picked up from earlier in the year, ~~indicators of~~ business fixed investment ~~have been~~ growth of business fixed investment has been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation ~~have declined~~ remain low; 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.~~ In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent. ~~The Committee continues to view~~ This action supports the Committee's view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective ~~as~~ are the most likely outcomes, but uncertainties about this outlook ~~have increased~~ remain. ~~In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.~~ As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.
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.
The Committee will conclude the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action ~~was James Bullard, who preferred at this meeting to lower the target range for the federal funds rate by 25 basis points~~ were Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.
Implementation Note issued July 31, 2019
| Removed | Added | Significance |
|---|---|---|
| "maintain the target range... at 2-1/4 to 2-1/2 percent" | "lower the target range... to 2 to 2-1/4 percent" | Policy Pivot: Shift from a hold to a rate cut (25bps). |
| "uncertainties... have increased" | "uncertainties... remain" | Tonal Softening: Moves from an alarming tone to a steady-state acknowledgment. |
| "have declined" (inflation compensation) | "remain low" | Inflation Outlook: Confirms that inflation expectations have bottomed/stagnated rather than continuing to fall. |
| (N/A) | "implications of global developments" | External Drivers: Explicitly links the rate cut to global headwinds (trade/geopolitics). |
| (N/A) | "conclude the reduction of... securities holdings... two months earlier" | Quantitative Tightening (QT): Accelerates the end of balance sheet runoff, providing additional liquidity. |
| Bullard (Voting against) | George and Rosengren (Voting against) | Internal Shift: The "dove" (Bullard) is now in the majority; the "hawks" are now the dissenters. |
The characterization of inflation has shifted from a dynamic of decline to one of stagnation. By changing "have declined" to "remain low," the Committee signals that while inflation is still below target, the downward momentum has paused. This provides the Committee with more "room" to cut rates without fearing a deflationary spiral.
The assessment of the labor market remains remarkably stable ("remains strong"), suggesting that the rate cut is not a response to a failing domestic labor market, but rather a preemptive strike. However, the phrasing regarding business investment ("growth of... has been soft") reinforces a concern that capital expenditure is the primary weak link in the domestic economy.
The guidance has shifted from a reactive posture ("will closely monitor") to a more proactive, contemplative posture ("As the Committee contemplates the future path"). This suggests the Committee is now actively mapping out a series of moves rather than waiting for a specific trigger. Furthermore, the acceleration of the end of balance sheet runoff (QT) acts as a complementary easing measure to the rate cut.
The Committee has shifted decisively Dovish.
This is evidenced by three primary factors: first, the actual 25 basis point reduction in the federal funds rate; second, the acceleration of the end of the balance sheet runoff (ending QT two months early); and third, the shift in the voting bloc, where the previous dissenter (Bullard) is now in the majority and the hawks (George/Rosengren) are now the dissenters. The explicit mention of "global developments" serves as the justification for this pivot, signaling that the Fed is moving into "insurance" mode to protect the expansion from external shocks.