FOMC Text Almost Identical to Statement of November 3rd

December 14, 2010

The FOMC, as one might imagine, was in no mood to rock the boat and felt no compelling reason to introduce significantly new material.  No modification was made in the parameters of QE2 or the zero to 0.25% federal funds target range.  Officials also reiterated the long-standing prediction that the federal funds target will probably stay at exceptionally low levels for quite some time longer.  Such a prediction was introduced in January 2009 with a time horizon of “for some time.”  The statement of March 2009 tweaked this key clause to “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” In November 2009, officials tweaked it once more, making the prediction contingent upon “low rates of resource utilization, subdued inflation trends, and stable inflation expectations,” and that’s how things still read.

Today’s new FOMC statement barely changed the text from the previous one.  The first paragraph, which addresses economic conditions and prospects makes two minor modifications: 1) describing the rate of continuing recovery as “insufficient to bring down unemployment” instead, as in November’s communique, calling the pace of recovery in output and employment “slow.”  A second change involves the characterization of household spending growth, now put at a “moderate pace” instead of “gradual.”

The second through sixth paragraphs are virtually the same verbatim texts as found in the release of November 3rd.  The second paragraph asserts that a return to the central bank’s twin statutory mandates is progressing at a pace that is “disappointingly slow,” those being the promotion of maximum employment and price stability.

Paragraph three stipulates the quantitative easing that is now being carried out along with a promise to review the QE settings regularly and adjust such as needed.  No adjustments were deemed necessary from the specifics laid out in the November 3rd statement.

The fourth paragraph concerns the federal funds rate staying at a target of 0 to 0.25% and the aforementioned conditional prediction of exceptionally low rates for an extended period.

If this were the ECB, paragraph five could be called the vigilance promise, a pledge to monitor all pertinent information and do whatever is need to promote its legal mandate.  The ECB has one goal, price stability.  The Fed is also entrusted to maximize employment.

The sixth paragraph names the ten votes in favor today’s action.  The seventh and final paragraph deals with Thomas Hoenig’s dissent.  Reserve district presidents other than for New York take turns on a rotating basis as voting FOMC members, although all the district presidents go to the meetings and are allowed to share in the discussion.  Hoenig of the Kansas City Fed cast a dissent at all eight meetings in 2010, preferring a more hawkish stance than the majority.  This meeting ends his right to vote, as he returns to non-voting status in 2011.  Hoenig’s objections are essentially the same mentioned in the November 3rd statement, a belief that a high level of monetary stimulus will promote risks of future economic and financial imbalances, as well as nudge expected inflation upward.

Taking a minimalist approach to editing text, the FOMC appears to have gone out of its way to keep a low profile.  No remark was made in the statement about the sharp increase in long-term interest rates since they met in early November and spelled out how QE2 was going to work.  Unlike the ECB Governing Council, the FOMC doesn’t indulge in comments about fiscal policy, where things have developed differently than assumed six weeks ago.  Officials also could have played up the better tone of U.S. economic data since end-October much more than they did, but economists are great believers in waiting for a body of data to accumulate before attaching permanence to a possible point of inflection.  That neutrality will be harder to maintain next time around.  If the better data tone persists next month, the monetary authorities will be put on the spot to define their expectations and intentions.  The next FOMC meeting is the last one before Chairman Bernanke’s winter Humphrey-Hawkins congressional testimony, hearings that could prove particularly cantankerous. 

Copyright 2010 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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