As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from July 31 and September 18, 2019. This period represents a critical phase of "insurance" rate cuts intended to protect the expansion against global headwinds.
Information received since the Federal Open Market Committee met in ~~June~~ July indicates that the labor market remains strong and that economic activity 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 ~~has picked up from earlier in the year~~ has been rising at a strong pace, business fixed investment ~~has been soft~~ and exports have weakened. 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 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 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~~ 1-3/4 to 2 percent. 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 are the most likely outcomes, but uncertainties about this outlook remain. 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 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~~ James Bullard, who preferred at this meeting to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent; and Esther L. George and Eric S. Rosengren, who preferred to maintain the target range at 2 percent to 2-1/4 percent.
Implementation Note issued September 18, 2019
| Removed | Added | Significance |
|---|---|---|
| "growth of... picked up from earlier in the year" | "rising at a strong pace" | Upgrades the characterization of consumer resilience. |
| "has been soft" | "and exports have weakened" | Broadens the scope of economic weakness to include external trade. |
| "2 to 2-1/4 percent" | "1-3/4 to 2 percent" | A 25bps rate cut, continuing the easing cycle. |
| Balance sheet reduction language | (Removed entirely) | The runoff (QT) has concluded; the focus is now solely on the FF rate. |
| Unanimous/Majority voting block | Bullard (Dovish dissent) / George & Rosengren (Hawkish dissent) | Increased internal fragmentation; the Committee is split on the speed of easing. |
Inflation
The characterization of inflation remains static. The Committee continues to note that inflation is "running below 2 percent" and that expectations remain "low" and "little changed." There is no shift toward seeing inflation as persistent; rather, the "muted inflation pressures" continue to justify the easing cycle.
Labor Markets & Growth
There is a notable divergence in growth drivers. While the labor market is still described as "strong," the Committee has shifted its view on the components of GDP. Household spending is now "strong" (upgraded from "picked up"), but the weakness in business investment has been compounded by a new concern: weakening exports. This suggests the Committee is increasingly worried about global trade tensions impacting domestic growth.
Forward Guidance
The forward guidance remains highly data-dependent and neutral. The language regarding the "timing and size of future adjustments" is identical to the previous statement. The Committee is avoiding a "commitment" to a specific number of cuts, instead emphasizing a wide range of indicators (labor, inflation, and international developments).
The Committee has shifted Dovish.
While the core guidance language remained unchanged, the actual policy action (a 25bps cut) and the updated economic assessment signal a more accommodative stance. Specifically, the addition of "weakened exports" to the list of economic headwinds provides the fundamental justification for the rate cut. Furthermore, the voting record reveals a shift in the internal debate: the emergence of a "dovish" dissenter (Bullard) who wanted a larger cut suggests that the center of gravity within the FOMC is moving toward more aggressive easing to counter global instability.