As a senior economist and central bank strategist, I have performed a comparative analysis of the July 29 and September 16, 2020, FOMC statements. This specific transition represents one of the most significant pivots in the Federal Reserve's modern history: the introduction of Flexible Average Inflation Targeting (FAIT).
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~~ COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. ~~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. 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~~ continue to weigh 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 seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, 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.~~ and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
~~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.~~ In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. ~~This assessment~~ The Committee's assessments will take into account a wide range of information, including ~~measures of~~ readings on public health, labor market conditions, ~~indicators of~~ inflation pressures and inflation expectations, and ~~readings on~~ financial and international developments.
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.
Voting against the action were Robert S. Kaplan, who expects that it will be appropriate to maintain the current target range until the Committee is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals as articulated in its new policy strategy statement, but prefers that the Committee retain greater policy rate flexibility beyond that point; and Neel Kashkari, who prefers that the Committee indicate that it expects to maintain the current target range until core inflation has reached 2 percent on a sustained basis.
Implementation Note issued September 16, 2020
| Removed | Added | Significance |
|---|---|---|
| "Confident that the economy has weathered recent events" | "Inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time" | Major Shift: Moves from a vague "weathering the storm" trigger to a specific, quantitative inflation-overshoot trigger. |
| "Symmetric 2 percent inflation objective" | "Aim to achieve inflation moderately above 2 percent for some time" | Policy Pivot: Formal adoption of Average Inflation Targeting (AIT). |
| "Sustain smooth market functioning" (as primary goal) | "Help foster accommodative financial conditions" | Intent Shift: QE is no longer just about market plumbing; it is now a tool for active economic stimulus. |
| Unanimous voting | Dissenting votes (Kaplan, Kashkari) | Internal Friction: Signals a divide within the Fed regarding the rigidity of the new inflation framework. |
The shift here is seismic. In July, the Fed viewed inflation as "muted" and sought a "symmetric 2 percent" goal (meaning they didn't want it too high or too low). By September, the Fed explicitly acknowledged that inflation had been "persistently below" the goal. They transitioned from a target to a strategy, explicitly stating they would now tolerate (and seek) inflation above 2% to make up for past shortfalls.
The language shifted from a general desire to support the economy to a specific requirement for labor market recovery. The "trigger" for raising rates is now explicitly tied to labor market conditions reaching levels consistent with "maximum employment," rather than the more ambiguous "weathering recent events."
The guidance became significantly more dovish and explicit. The July statement was reactive ("will use its tools and act as appropriate"). The September statement is prescriptive, providing a clear roadmap: rates stay at zero until both maximum employment is reached and inflation is on a trajectory to exceed 2%. This effectively pushed back the expected timeline for any rate hikes by years.
Verdict: Strongly Dovish
The Committee shifted from a posture of "crisis management" to a posture of "aggressive long-term stimulus." By introducing the Average Inflation Targeting (AIT) framework, the Fed essentially lowered the bar for keeping interest rates at zero. The most dovish element is the commitment to allow inflation to overshoot 2% before considering a policy tightening. Furthermore, the shift in the purpose of asset purchases—from "market functioning" to "fostering accommodative financial conditions"—signals a more aggressive interventionist stance. The presence of two dissents underscores that even some members felt this new framework was too restrictive in its commitment to low rates.