As a senior economist and central bank strategist, I have performed a comparative analysis of the FOMC statements from September 21, 2022, and November 2, 2022. This period represents a critical pivot in the Fed's communication strategy during the 2022 tightening cycle.
Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.
Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to ~~3 to 3-1/4 percent~~ 3-3/4 to 4 percent. ~~and anticipates that ongoing increases in the target range will be appropriate.~~ The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent 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. 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; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.
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Implementation Note issued ~~September 21, 2022~~ November 2, 2022
| Removed | Added | Significance |
|---|---|---|
| "3 to 3-1/4 percent" | "3-3/4 to 4 percent" | Execution of a 50bps rate hike. |
| "anticipates that ongoing increases... will be appropriate" | "...sufficiently restrictive to return inflation to 2 percent over time" | Shift from simply "increasing rates" to defining the goal as a "restrictive stance." |
| (N/A) | "In determining the pace... will take into account cumulative tightening, lags... and financial developments" | Introduction of "calibration" language; signaling that the speed of hikes may change based on lagged effects. |
Inflation
The characterization of inflation remains unchanged ("remains elevated"), but the strategy to combat it has evolved. The Committee has moved from a general commitment to raising rates to a specific objective of achieving a "sufficiently restrictive" stance. This indicates the Fed is no longer just "tightening" but is now focused on reaching a specific terminal rate that actively suppresses demand.
Labor Markets & Growth
There is zero change in the language regarding spending, production, and job gains. This suggests that, as of November 2, the Committee still viewed the labor market as a source of strength (or potential inflationary pressure) rather than a source of immediate concern.
Forward Guidance
This is the most significant area of shift. The previous statement provided a blunt signal that rates would continue to rise. The new statement introduces nuance and caution. By mentioning "cumulative tightening" and "lags," the Fed is signaling to the markets that they are aware that previous hikes are still working their way through the economy. This is a strategic move to maintain flexibility—allowing them to slow the pace of hikes without appearing "dovish."
The Committee has shifted to a "Calibrated Hawkish" tone. While the action (a 50bps hike) and the goal ("sufficiently restrictive") are firmly hawkish, the addition of language regarding "lags" and "cumulative tightening" introduces a dovish nuance. The Fed is effectively saying: "We are still going higher, but we are now watching the clock and the calendar to ensure we don't over-tighten." It is a transition from "blind acceleration" to "calculated braking."