As a senior economist and central bank strategist, I have analyzed the transition between the March 15 and March 23, 2020, statements. This period represents one of the most aggressive pivots in the history of the Federal Reserve, moving from "crisis management" to "total market intervention."
~~The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected. Available economic data show that the U.S. economy came into this challenging period on a strong footing. Information received since the Federal Open Market Committee met in January indicates that the labor market remained strong through February and economic activity rose at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending rose at a moderate pace, business fixed investment and exports remained weak. More recently, the energy sector has come under stress. 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; 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. The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee's symmetric 2 percent objective.~~
~~The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, 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 Federal Reserve is committed to use its full range of tools to support the U.S. economy in this challenging time and thereby promote its maximum employment and price stability goals.
The Federal Open Market Committee is taking further actions to support the flow of credit to households and businesses by addressing strains in the markets for Treasury securities and agency mortgage-backed securities. The Federal Reserve will continue to purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions. The Committee will include purchases of agency commercial mortgage-backed securities in its agency mortgage-backed security purchases. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will continue to closely monitor market conditions, and will assess the appropriate pace of its securities purchases at future meetings.
Voting (by notation) for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles. ~~Voting against this action was Loretta J. Mester, who was fully supportive of all of the actions taken to promote the smooth functioning of markets and the flow of credit to households and businesses but preferred to reduce the target range for the federal funds rate to 1/2 to 3/4 percent at this meeting.~~
In a related set of actions, the Federal Reserve announced additional measures to support the flow of credit to households and businesses. More information can be found on the Federal Reserve Board's website.
In connection with these plans, the Committee voted unanimously to authorize and direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:
"Effective March 23, 2020, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 0 to 1/4 percent. The Committee directs the Desk to increase the System Open Market Account holdings of Treasury securities and agency mortgage-backed securities (MBS) in the amounts needed to support the smooth functioning of markets for Treasury securities and agency MBS. The Committee also directs the Desk to include purchases of agency commercial mortgage-backed securities in its agency mortgage-backed security purchases.
The Committee also directs the Desk to continue conducting term and overnight repurchase agreement operations to ensure that the supply of reserves remains ample and to support the smooth functioning of short-term U.S. dollar funding markets. In addition, the Committee directs the Desk to conduct overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.00 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and to reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month in agency mortgage-backed securities. Small deviations from these amounts for operational reasons are acceptable.
The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
More information regarding open market operations and reinvestments may be found on the Federal Reserve Bank of New York's website.
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| Removed | Added | Significance |
|---|---|---|
| Detailed economic assessment (GDP, labor market, inflation data). | "In the amounts needed" (Open-ended QE). | Shift from data-dependent guidance to "whatever it takes" intervention. |
| Specific QE caps ($500B Treasury / $200B MBS). | Inclusion of Agency Commercial MBS (CMBS). | Expansion of the Fed's balance sheet footprint into riskier credit sectors. |
| Discussion of "symmetric 2% inflation objective." | Detailed operational directives (Reverse Repos, Dollar Rolls). | Transition from policy intent to technical execution of market stabilization. |
| Dissent by Loretta Mester. | Unanimous voting (by notation). | Total Committee alignment in the face of systemic crisis. |
Inflation
The most striking shift is the complete removal of inflation commentary. In the March 15 statement, the Fed spent a full paragraph discussing inflation running below 2% and monitoring expectations. By March 23, inflation is no longer mentioned as a constraint or a metric. This signals that the Committee has effectively "suspended" its concern over inflation in favor of preventing a total financial collapse.
Labor Markets & Growth
The narrative has shifted from descriptive to urgent. The previous statement spent significant time arguing that the economy entered the crisis on a "strong footing" with "solid" job gains. The current statement deletes all references to prior economic strength, replacing them with a commitment to support the economy "in this challenging time." The focus has moved from analyzing the damage to mitigating it.
Forward Guidance
The Fed has moved from conditional guidance to operational directives. The March 15 statement used traditional language ("The Committee expects to maintain... until it is confident"). The March 23 statement replaces this with a "domestic policy directive" to the Desk. Most importantly, the shift from specific dollar amounts (capped QE) to "in the amounts needed" represents a move to open-ended quantitative easing, removing any ceiling on the Fed's intervention.
The Committee shifted extremely Dovish. While the federal funds rate remained at 0–1/4%, the "dovishness" is found in the abandonment of quantitative limits and the removal of inflation concerns. By deleting the economic data analysis and replacing it with a mandate to provide liquidity "in the amounts needed," the Fed signaled that it would provide unlimited support to the financial system regardless of the impact on the balance sheet. The shift from a dissenting vote to a unanimous "by notation" vote further underscores a desperate, unified pivot toward maximum monetary accommodation.