The Fed's December 2011 and Jan 2012 statements have some notable differences...
Fed January 2012
Fed December 2011
The main change between these two reports is that the Fed has shifted the period of the ultra-low funds rate end to late 2014 from mid-2013.
Also in the new statement Jeffrey Lacker has dissented:
"Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate.”
The Fed dropped one of its key statements about inflation vigilance compared to December. One thing we noted in this month’s inflation report is that core–services sector inflation has continued to creep up. The Fed seems to be ready to put up with this inflation up-creep aside for a while.
A portion of the Fed’s December statement is below. The portion in red is now gone.
The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
The Fed also seems to have linked changes in its securities purchase program more directly to changing views on the economy (see below). Does that mean that it is going to make shifts more quickly in the future based on a changing economic view?
The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.
Previous the Fed had said vaguely that it was prepared to use its tools…
The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.
The Fed is for some reason setting aside the pick-up in growth we have seen over the past few months. There is little way to understand the Fed’s shift to push out longer into the future the period for which it thinks rates will remain ultra-low. To me this is a confidence-killing statement.
Moreover, the shift toward less inflation concern suggests a Keynesian view has taken hold and the monetarist view has been set aside along with the observed up-shift in the highly trend dominate core services inflation rate. Is it true that inflation cannot rise if there is economic slack or a large GDP gap? Is that the belief that is behind this shift? Given that the data are going the other direction right now, this conflict between Monetarists and Keynesians bears a lot of watching
We do not know if the Fed made these changes in language because it is pessimistic on the economy’s rebound or if it is worried about Europe or the global economy. It seems to be a policy move that goes in a direction opposite that of the recent economic data and weights weakness and risk in Europe relatively more heavily.
We may find out more about this later today.