As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from November 3 and December 15, 2021. This period represents a critical pivot point in the Federal Reserve's approach to the post-pandemic recovery.
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.
With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months ~~but the summer's rise in COVID-19 cases has slowed their recovery~~ but continue to be affected by COVID-19. Job gains have been solid in recent months, and the unemployment rate has declined substantially. ~~Inflation is elevated, largely reflecting factors that are expected to be transitory.~~ Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation ~~sizable price increases in some sectors~~. 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 continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. ~~With inflation having run 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.~~ In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent. ~~The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and~~ With inflation having exceeded 2 percent for some time, the Committee 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 light of ~~the substantial further progress the economy has made toward the Committee's goals since last December~~ inflation developments and the further improvement in the labor market, the Committee decided to ~~begin reducing~~ reduce the monthly pace of its net asset purchases by $20 billion ~~$10 billion~~ for Treasury securities and $10 billion ~~$5 billion~~ for agency mortgage-backed securities. ~~Beginning later this month, the Committee will increase its holdings of Treasury securities by at least $70 billion per month and of agency mortgage-backed securities by at least $35 billion per month. Beginning in December, the Committee will increase its holdings of Treasury securities by at least $60 billion per month and of agency mortgage-backed securities by at least $30 billion per month.~~ Beginning in January, the Committee will increase its holdings of Treasury securities by at least $40 billion per month and of agency mortgage-backed securities by at least $20 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook. The Federal Reserve's ongoing purchases and holdings of securities will continue to 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.
| Removed | Added | Significance |
|---|---|---|
| "largely reflecting factors that are expected to be transitory" | "continued to contribute to elevated levels of inflation" | Major. The removal of the word "transitory" signals a fundamental shift in the Fed's view of inflation persistence. |
| "inflation has risen to 2 percent and is on track to moderately exceed 2 percent" | "With inflation having exceeded 2 percent for some time" | Critical. The Fed is no longer waiting for inflation to reach 2%; it acknowledges it is already above it. |
| "aim to achieve inflation moderately above 2 percent for some time" | (Entire section on AIT/Average Inflation Targeting removed) | Strategic. De-emphasizing the "overshoot" goal suggests the Fed is moving toward a more traditional inflation-fighting stance. |
| $10B Treasury / $5B MBS taper pace | $20B Treasury / $10B MBS taper pace | Quantitative. The acceleration of the taper (doubling the speed) indicates a desire to tighten liquidity faster. |
The shift here is seismic. In November, inflation was characterized as "elevated" but "transitory." By December, the word "transitory" has been completely excised. The Committee now describes inflation as "elevated levels" that have "exceeded 2 percent for some time." This marks the transition from viewing inflation as a temporary supply-side glitch to treating it as a persistent macroeconomic risk.
The tone regarding the labor market has shifted from "recovery" to "strength." The addition of "Job gains have been solid" and "unemployment rate has declined substantially" serves as the justification for tightening. The Fed is signaling that the labor market is now strong enough to withstand the withdrawal of stimulus (the taper).
The forward guidance has become significantly more aggressive. The Committee removed the explicit commitment to maintain an accommodative stance until inflation averages 2%. More importantly, the "trigger" for raising rates has been simplified: they are no longer waiting for inflation to "moderately exceed 2%," but are now focusing primarily on whether labor market conditions are consistent with maximum employment.
Verdict: Strongly Hawkish
The Committee has shifted decisively toward a hawkish stance. This is evidenced by three primary actions: (1) the silent deletion of the "transitory" narrative, (2) the doubling of the pace of the balance sheet taper (from $15B total to $30B total per month), and (3) the removal of the language regarding the need for inflation to "overshoot" 2% before policy tightens. By acknowledging that inflation has already exceeded the target "for some time," the Fed has cleared the intellectual runway for future interest rate hikes.