As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from November 5 and December 16, 2020.
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 COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, 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 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.
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 mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.~~ the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
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. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and 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;~~ Mary C. Daly; Patrick Harker; Robert S. Kaplan; Loretta J. Mester; and Randal K. Quarles. ~~Ms. Daly voted as an alternate member at this meeting.~~ Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.
Implementation Note issued December 16, 2020
| Removed | Added | Significance |
|---|---|---|
| "over coming months... at least at the current pace" | "continue to increase... by at least $80 billion [Treasuries]... $40 billion [MBS] per month" | Quantification: Moves from vague "current pace" to explicit, hard dollar amounts, increasing transparency and market certainty. |
| "to sustain smooth market functioning" (as a primary goal) | "until substantial further progress has been made toward... maximum employment and price stability goals" | Outcome-Based Guidance: Shifts the justification for QE from "market functioning" (technical) to "economic outcomes" (fundamental). |
| General voting list / Alternate status for Ms. Daly | Updated voting list including Neel Kashkari | Administrative: Reflects changes in the voting rotation/membership of the Committee. |
Inflation
There is no shift in the characterization of inflation. The Committee maintains its "Flexible Average Inflation Targeting" (FAIT) framework, explicitly stating that inflation has been running "persistently below" the 2% goal and that they seek a moderate overshoot. The language remains identical, signaling a steady commitment to this regime.
Labor Markets & Growth
The assessment of the macro environment remains static. The Committee continues to view the recovery as ongoing but "well below" pre-pandemic levels. There is no change in the perceived risks to employment or the weight of the public health crisis on economic activity.
Forward Guidance
This is the area of significant evolution. The Committee has shifted from "process-based" guidance (increasing holdings at the current pace) to "outcome-based" guidance. By tying the continuation of Quantitative Easing (QE) to "substantial further progress" on employment and inflation, the Fed has signaled that it will not taper asset purchases based on a calendar date, but rather on specific economic milestones.
The Committee has shifted Dovish.
While the federal funds rate remained unchanged, the shift in the asset purchase language is a clear dovish signal. By replacing the phrase "over coming months" with a commitment to continue purchases "until substantial further progress has been made," the Fed has effectively extended the horizon of its stimulus. Furthermore, by quantifying the monthly purchases ($120bn total), they have provided a guaranteed floor of liquidity to the markets, reducing the perceived risk of a premature taper. The tone is one of reinforced commitment to aggressive support.