According to Aneta Markowska of Societe Generale, there were few substantive changes in today’s FOMC statement. The Fed gave a modest nod to inflation doves by acknowledging that persistently low inflation is bad news, but fell short of revising its rate guidance as some have suggested. The Committee also reaffirmed its view that rates are likely to remain at current levels long after the recovery strengthens. While the overall tone of the statement is slightly more dovish, SocGen doen’t view it as a game changer in the outlook for monetary policy.

FOMC

FOMC acknowledges inflation is bad news

Perhaps the most important change in today’s FOMC statement was the acknowledgment that persistently low inflation is bad news. Specifically, the Committee recognized that “inflation persistently below its 2 percent objective could pose risks to economic performance” … but later qualified that it doesn’t expect that to actually materialize. This was clearly a nod to inflation doves, specifically James Bullard and Narayana Kocherlakota who have been voicing concern about the recent inflation softness. Bullard, who dissented back in June, voted in line with the consensus today, so he was clearly satisfied with the inclusion of the new phrase.

New language inserted in FOMC statements

Importantly, this new language was inserted in the second paragraph of the statement which discusses progress toward the Fed’s mandate. The Fed did not alter its guidance for rates as has been recently suggested. The liftoff in rates is still conditioned on unemployment at or below 6.5%, so long as inflation outlook remains below 2.5%. Some have suggested that the Fed could include a lower inflation threshold of 1.5% below which the Committee would commit not to raise rates. The Fed clearly did not want to go this far.

FOMC statement likely to change path of policies

We agree with the Fed that the recent downtick in inflation is likely to be transitory. As long as the unemployment rate continues to drop and the excess slack in the economy is eroded, inflation should gradually return toward the 2% target. Given the outlook, we don’t believe that the new language changes the likely path of policy rates.