As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from December 16, 2020, and January 27, 2021.
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.~~ The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic. 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, including progress on vaccinations. The ongoing public health crisis ~~will continue~~ continues 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, 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; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.~~ Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller.
Implementation Note issued January 27, 2021
| Removed | Added | Significance |
|---|---|---|
| "Economic activity and employment have continued to recover..." | "The pace of the recovery... has moderated in recent months..." | Bearish Growth Signal: Shifts from a narrative of steady recovery to one of slowing momentum. |
| (Implicitly) General virus course | "...including progress on vaccinations" | Specific Catalyst: Explicitly links the economic recovery timeline to the vaccine rollout. |
| "will continue to weigh... in the near term" / "over the medium term" | "continues to weigh" | Urgency/Current State: Shifts from a predictive future outlook to a description of current ongoing pressure. |
| Previous voting members | New rotating voting members | Administrative: Standard rotation of regional bank presidents. |
There is no change in the inflation narrative. The Committee maintains its commitment to "Average Inflation Targeting" (AIT), explicitly stating that inflation remains "persistently below" the 2% goal. The language regarding the need for inflation to "moderately exceed 2 percent for some time" remains untouched, signaling that the Fed sees no immediate threat of overheating.
This is the area of most significant shift. The previous statement noted a continued recovery (albeit from a low base). The current statement introduces the word "moderated," which in central bank parlance is a coded signal that growth is slowing. By specifying that weakness is "concentrated in the sectors most adversely affected by the pandemic" (e.g., hospitality, travel), the Fed is acknowledging a "K-shaped" recovery and signaling that the labor market is not healing uniformly.
The forward guidance remains strictly accommodative. There are no changes to the federal funds rate target or the quantitative easing (QE) pace ($120bn/month). The "data-dependency" language remains identical, indicating that the threshold for tightening (maximum employment + inflation > 2%) is still far off.
The Committee has shifted Dovish.
While the policy rates and asset purchases remained unchanged, the economic assessment became more pessimistic. By replacing "continued to recover" with "moderated," the Fed is signaling that the economy is struggling more than previously anticipated. Furthermore, by explicitly mentioning "progress on vaccinations" as a dependency, the Fed is admitting that the path to recovery is not organic but contingent on a medical breakthrough. This creates a stronger justification for maintaining ultra-low rates and aggressive QE for a longer duration.