As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from June 10 and July 29, 2020. This period represents a critical phase of the pandemic response where the Committee began transitioning from "crisis management" to "recovery monitoring."
The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.
The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. ~~The virus and the measures taken to protect public health have induced sharp declines in economic activity and a surge in job losses.~~ Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year. Weaker demand and significantly lower oil prices are holding down consumer price inflation. ~~Financial conditions have improved~~ Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 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.
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.
To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate.
Voting 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.
Implementation Note issued July 29, 2020
| Removed | Added | Significance |
|---|---|---|
| "The virus... induced sharp declines... and a surge in job losses." | "economic activity and employment have picked up somewhat in recent months..." | Shift from Shock to Recovery: Acknowledges the first signs of a rebound, though notes they remain "well below" pre-pandemic levels. |
| "Financial conditions have improved" | "Overall financial conditions have improved in recent months" | Temporal Precision: Adds "in recent months" and "overall," suggesting a more nuanced view of market stability. |
| (N/A) | "The path of the economy will depend significantly on the course of the virus." | Explicit Dependency: Formally links the macroeconomic trajectory directly to the epidemiological trajectory. |
Inflation
There is no change in the characterization of inflation. The Committee maintains that "weaker demand and significantly lower oil prices are holding down consumer price inflation" and continues to refer to "muted inflation pressures." This indicates that despite a slight pickup in activity, the Fed remains deeply concerned about deflationary risks or a failure to reach the 2% target.
Labor Markets & Growth
There is a notable shift from "crisis" to "fragile recovery." The June statement focused on the cause of the decline (the virus and public health measures). The July statement acknowledges that activity and employment have "picked up somewhat." However, the Committee carefully qualifies this by stating levels remain "well below" the start of the year, signaling that the recovery is not yet self-sustaining.
Forward Guidance
The forward guidance remains identical. The Committee continues to tie the federal funds rate to the "confidence" that the economy has "weathered recent events." By keeping the language on the 2% symmetric inflation objective and the "full range of tools" unchanged, the Fed is signaling that the slight pickup in activity is not yet sufficient to warrant any change in the ultra-accommodative policy stance.
The Committee remained Neutral to slightly Dovish. While the text acknowledges a "somewhat" improved economic and employment situation (which would typically be a hawkish signal), this is heavily offset by the new explicit warning that the economy's path "will depend significantly on the course of the virus." By maintaining the exact same aggressive asset purchase commitments and rate guidance despite the slight recovery, the Fed is signaling that it will not prematurely withdraw support. The tone is one of cautious optimism tempered by high uncertainty.