Fed policy statements compared
Big surprise comes in small revision package
The chart below is the most important new piece of information we had on the
economy in quite a long time. Released today ahead of the FOMC meeting or as it
was in progress. It shows that the economy was relatively stronger in 2012 than
we thought and that the deceleration in the 2013 is much more severe than what
we thought. As such it would be surprising if the Fed did not become more
concerned about its projecting that the job market is going to do better since
over the last 24 months private sector job growth has averaged 196,000 persons
per month. When the economy was going 3% that made sense, now that the economy’s
year-over-year growth rate is under 1.5% it would be prudent to question if such
job market growth can continue. Yet, the Fed did not go there today. In fact,
it seems to have gone in the opposite direction.
Economists
are being raked over coals frequently for their microscopic parsing of the
changes the Federal Reserve statements. However, when the Fed makes the kind of
very small changes from statement to statement you’d be foolish to not realize
that the Fed is trying to communicate something to us. In the second paragraph
the Fed makes what appears to be an extraordinarily small change in language
which seems to have a relatively large effect on what the paragraph means.
The Fed used to say that it anticipates
inflation will grow ‘at or below its 2% objective’.
However the Fed has been under pressure from James Bullard who dissented last
meeting but did not dissent at this meeting. He had urged the Fed to not ignore
the inflation undershoot and risk from it. So interestingly, this month the Fed
changed the language, it now reads as follows: The
Committee recognizes that inflation persistently below its 2 percent objective
could pose risks to economic performance, but it anticipates that inflation
will move back toward its objective over the medium term.
I have to
say I find this change disturbing. The Fed seems to have changed its forecast
or assessment of the economy for the sake of creating language that removes
Bullard’s dissent. The Fed language now says that it realizes that inflation
persistently below 2% could pose an economic risk, acknowledging the criticism
that Bullard launched at the last meeting, but sets it aside by saying that it
expects inflation will move back towards its objective over the medium-term. That
does take-care Bullard’s criticism and also the concerns and I had registered
in line with Bullard’s criticism at the last meeting. However, it’s completely
different from saying that it expects inflation to remain at or below 2%, also
over the medium-term…which is what the passage used to say. Which is it? Does
the Fed really believe inflation will stay below 2% or go back up to 2%?
I believe
this is the first time in a long time that we’ve caught the Fed red-handed, with
hand in the cookie jar. The Fed has just changed some language and it’s totally
changed the way it claims that it sees the evolution of inflation. This plays
into our worst fears: that the FOMC policy statement is a statement intended to
justify whatever policy the Fed wants to implement rather than laying out a
true roadmap that it intends to follow and to be governed by. That in fact was
essentially the gist of the Bullard criticism last meeting.
In the
fifth paragraph the Fed makes the following change in language which is an
extremely small tweak with another big impact: “To support continued progress toward maximum employment and price
stability, the Committee today reaffirmed its view that a highly accommodative stance of
monetary policy will remain appropriate for a considerable time after the asset
purchase program ends and the economic recovery strengthens”.
The
highlighted yellow language replaces the word “expects”.
Why would I make a big deal out of that? Of course it is a big deal! It’s a big
deal because the Fed made the change. Look at how little of this statement was
altered! Why would they make THAT change? Clearly the Fed thinks it is significant
to say that it ‘reaffirmed its view’ rather than to say that it ‘expects’. The Fed apparently now has a view that does
not reflect its expectation! And, oh, does that make MY head hurt. I really
don’t want to haul out my dictionary or find someone with a PhD in English to
carefully ‘Splain’ to me like Ricky might to Lucy what this means. It seems clear
that the Fed has had another FOMC mud-wrestling match that has resulted in the
English language being taken to the mat. And now it appears that there is more
dissent within the Fed about keeping this highly accommodative stance of policy
for considerable time after the asset purchase program ends. Why else would
they change the language?
Does this mean that forward guidance is
being attacked from within? What else could it mean? Isn’t this view the
whole notion behind the extended accommodative forward guidance the Fed has?
Put on
your thinking cap! Something is afoot at the Fed. Policy is hanging by the
thinnest threads of hair splitting verbiage. And you thought that you needed to
know ‘math’ to be an economist! A PhD in English might help- or not. It makes
me wonder if Plosser, George, Fisher and Lacker are drawing support from other
members of the committee. Also I wonder if Bernanke is losing influence now
that he is being made a lame duck by Obama. This, of course is not evidence of
Yellen gaining since this is a shift away from her desired policy. I wonder if
Yellen is being handcuffed by the fact that she is under the microscope as a
potential Bernanke successor? The Fed,
and its balance of power, appears to be in play.
Minutes from June 19 2003 Meetings
Information received since
the Federal Open Market Committee met in May suggests that economic activity
has been expanding at a moderate pace. Labor market conditions have shown
further improvement in recent months, on balance, but the unemployment rate
remains elevated. Household spending and business fixed investment advanced,
and the housing sector has strengthened further, but fiscal policy is
restraining economic growth. Partly reflecting transitory influences, inflation
has been running below the Committee's longer-run objective, but longer-term
inflation expectations have remained stable.
Consistent with its statutory
mandate, the Committee seeks to foster maximum employment and price stability.
The Committee expects that, with appropriate policy accommodation, economic
growth will proceed at a moderate pace and the unemployment rate will gradually
decline toward levels the Committee judges consistent with its dual mandate.
The Committee sees the downside risks to the outlook for the economy and the
labor market as having diminished since the fall. The Committee also
anticipates that inflation over the medium term likely will run at or below its 2 percent objective.
No Change
To support a stronger
economic recovery and to help ensure that inflation, over time, is at the rate
most consistent with its dual mandate, the Committee decided to continue
purchasing additional agency mortgage-backed securities at a pace of $40
billion per month and longer-term Treasury securities at a pace of $45 billion
per month. The Committee is maintaining its existing policy of reinvesting
principal payments from its holdings of agency debt and agency mortgage-backed
securities in agency mortgage-backed securities and of rolling over maturing
Treasury securities at auction. Taken together, these actions should maintain
downward pressure on longer-term interest rates, support mortgage markets, and
help to make broader financial conditions more accommodative.
The
Committee will closely monitor incoming information on economic and financial
developments in coming months. The Committee will continue its purchases of
Treasury and agency mortgage-backed securities, and employ its other policy
tools as appropriate, until the outlook for the labor market has improved
substantially in a context of price stability. The Committee is prepared to
increase or reduce the pace of its purchases to maintain appropriate policy
accommodation as the outlook for the labor market or inflation changes. In
determining the size, pace, and composition of its asset purchases, the
Committee will continue to take appropriate account of the likely efficacy and
costs of such purchases as well as the extent of progress toward its economic
objectives.
To
support continued progress toward maximum employment and price stability, the
Committee expects that a highly
accommodative stance of monetary policy will remain appropriate for a
considerable time after the asset purchase program ends and the economic
recovery strengthens. In particular, the Committee decided to keep the target
range for the federal funds rate at 0 to 1/4 percent and currently anticipates
that this exceptionally low range for the federal funds rate will be
appropriate at least as long as the unemployment rate remains above 6-1/2
percent, inflation between one and two years ahead is projected to be no more
than a half percentage point above the Committee's 2 percent longer-run goal, and
longer-term inflation expectations continue to be well anchored. In determining
how long to maintain a highly accommodative stance of monetary policy, the
Committee will also consider other information, including additional measures
of labor market conditions, indicators of inflation pressures and inflation
expectations, and readings on financial developments. When the Committee
decides to begin to remove policy accommodation, it will take a balanced
approach consistent with its longer-run goals of maximum employment and
inflation of 2 percent.
Voting
for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C.
Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell;
Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and
Janet L. Yellen. Voting against the action was James Bullard, who believed that
the Committee should signal more strongly its willingness to defend its
inflation goal in light of recent low inflation readings, and
Esther L. George, who was concerned that the continued high level of monetary
accommodation increased the risks of future economic and financial imbalances
and, over time, could cause an increase in long-term inflation expectations.
Minutes from July 31, 2013 Meeting
Information received since
the Federal Open Market Committee met in June suggests that economic activity
expanded at a modest pace during the first half of the year. Labor market
conditions have shown further improvement in recent months, on balance, but the
unemployment rate remains elevated. Household spending and business fixed
investment advanced, and the housing sector has been
strengthening, but mortgage rates have risen
somewhat and fiscal policy is restraining economic growth. Partly
reflecting transitory influences, inflation has been running below the
Committee's longer-run objective, but longer-term inflation expectations have
remained stable.
Consistent with its statutory
mandate, the Committee seeks to foster maximum employment and price stability.
The Committee expects that, with appropriate policy accommodation, economic
growth will pick up from its recent pace and the unemployment rate will
gradually decline toward levels the Committee judges consistent with its dual
mandate. The Committee sees the downside risks to the outlook for the economy
and the labor market as having diminished since the fall. The Committee recognizes that inflation persistently below
its 2 percent objective could pose risks to economic performance, but it
anticipates that inflation will move back toward its objective over the
medium term.
No Change
To support a stronger
economic recovery and to help ensure that inflation, over time, is at the rate
most consistent with its dual mandate, the Committee decided to continue
purchasing additional agency mortgage-backed securities at a pace of $40
billion per month and longer-term Treasury securities at a pace of $45 billion
per month. The Committee is maintaining its existing policy of reinvesting
principal payments from its holdings of agency debt and agency mortgage-backed
securities in agency mortgage-backed securities and of rolling over maturing
Treasury securities at auction. Taken together, these actions should maintain
downward pressure on longer-term interest rates, support mortgage markets, and
help to make broader financial conditions more accommodative.
The Committee will closely
monitor incoming information on economic and financial developments in coming
months. The Committee will continue its purchases of Treasury and agency
mortgage-backed securities, and employ its other policy tools as appropriate,
until the outlook for the labor market has improved substantially in a context
of price stability. The Committee is prepared to increase or reduce the pace of
its purchases to maintain appropriate policy accommodation as the outlook for
the labor market or inflation changes. In determining the size, pace, and
composition of its asset purchases, the Committee will continue to take
appropriate account of the likely efficacy and costs of such purchases as well
as the extent of progress toward its economic objectives.
To support continued progress
toward maximum employment and price stability, the Committee
today reaffirmed its view that a highly accommodative stance of monetary
policy will remain appropriate for a considerable time after the asset purchase
program ends and the economic recovery strengthens. In particular, the
Committee decided to keep the target range for the federal funds rate at 0 to
1/4 percent and currently anticipates that this exceptionally low range for the
federal funds rate will be appropriate at least as long as the unemployment
rate remains above 6-1/2 percent, inflation between one and two years ahead is
projected to be no more than a half percentage point above the Committee's 2
percent longer-run goal, and longer-term inflation expectations continue to be
well anchored. In determining how long to maintain a highly accommodative
stance of monetary policy, the Committee will also consider other information,
including additional measures of labor market conditions, indicators of inflation
pressures and inflation expectations, and readings on financial developments.
When the Committee decides to begin to remove policy accommodation, it will
take a balanced approach consistent with its longer-run goals of maximum
employment and inflation of 2 percent.
Voting for the FOMC monetary
policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice
Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell;
Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and
Janet L. Yellen. Voting against the action was Esther L. George, who was
concerned that the continued high level of monetary accommodation increased the
risks of future economic and financial imbalances and, over time, could cause
an increase in long-term inflation expectations.
