As many Fed watchers expected, most of the changes to the January Federal Open Market Committee (FOMC) statement relative to the December statement were in the first two paragraphs discussing information received since the last meeting. By my count, there was one upgrade in the language (“labor market conditions improved further”) and no fewer than five downgrades:
“inventory investment slowed”
“household spending and business fixed investment have been increasing at moderate rates” [versus “solid rates” in the December statement]
“inflation compensation declined further”
“inflation is expected to remain low in the near term”
“The Committee is closely monitoring global economic and financial developments and is assessing their implications for … the outlook.”
Importantly – for now – the Fed says measures of longer-term inflation expectations are “little changed” in recent months, which I judge to be neutral. That said, the Fed removed language from December that indicated it was “reasonably confident” that inflation would rise to 2 percent over the medium term, but kept the language that “Inflation is expected … to rise to 2 percent over the medium term.”
The rest of the statement was unchanged. Of particular note, the Fed still expects “only gradual” increases in the fed funds rate, and the statement also retains the language that the Fed will monitor “actual” progress toward its inflation goal.
So the statement did the minimum in acknowledging the reality of the data flow since December and revived language from September (absent in December) that “global developments” are again on the radar screen. That said, this January statement is essentially a placeholder, neither ruling out nor signaling any likelihood of a March hike. Fed policymakers are hoping that recent soft data and global financial turmoil are transitory events that they will be able to look through. But the statement clearly conveys that if these events aren’t transitory, a “further assessment” of their implications will inform the discussion at the March FOMC meeting. Fed Vice Chair Stan Fischer is scheduled to speak next week, and the following week Chair Janet Yellen will be on Capitol Hill for two days of testimony. So top Fed officials will have ample opportunity to add additional insight into their assessment of the global economy heading into the March meeting.