By Laura Hopper, Public Affairs Staff
For non-economists, this might seem like textbook jargon:
Summarized in the context of who’s saying them, though, these words can move mountains—or at least markets.
Image courtesy of Federal Reserve
The phrases above come from statements issued after meetings of the Federal Open Market Committee, known more commonly as the FOMC. The FOMC is the primary monetary policymaking body of our nation’s central bank, the Federal Reserve. The Fed has a mandate from Congress to promote the macroeconomic objectives of maximum sustainable employment and stable prices, and the FOMC is firmly committed to fulfilling this statutory mandate.
The FOMC typically meets eight times a year in Washington, D.C. The actions announced after each meeting have a ripple effect. Broadly, the FOMC can influence the supply of money in the economy, as well as influence interest rates in markets. These decisions can then affect the availability of credit and the level of interest rates paid by businesses and consumers.
It’s no wonder, then, that investors and consumers alike stop and listen when FOMC actions are announced. Or that the FOMC’s actions are what come to mind when the Fed comes up in general conversation: Did they decide to raise rates? How is the stock market reacting?
“If I turn out to be particularly clear, you’ve probably misunderstood what I said.” – Former Fed Chair Alan Greenspan in a 1988 speech, early in his Fed tenure, as quoted in the New York Times.
Statements like this led to a term popular in economic circles: Fedspeak. Many analysts speculated that Greenspan intentionally kept his statements vague to avoid overreaction by markets or private investors. That approach evolved in the early 2000s, as being more transparent to the public became a growing priority for the FOMC and the Fed in general.
And then there are the FOMC statements themselves. Until early 1994, the Fed did not issue a statement after an FOMC meeting. The first statement appeared in 1994, just four sentences, focused only on the Fed’s decision to change the federal funds target interest rate.
Subsequent statements grew to several (albeit brief) paragraphs that also included a description of the state of the economy and the rationale for the FOMC’s policy action. In January 2000, the FOMC announced it would issue a statement after each regular meeting, even if there was no change in policy.
Although forecasting the economy is a complex undertaking, modern FOMC statements follow a simple structure with distinct parts. The next time an FOMC statement is released, show off your knowledge to family and friends by following this guide to understanding its words.
|You don’t have to be an economist to understand the FOMC’s communications.|
|Key Features||What They Contain|
|Feature 1||Recent economic developments: What has happened since the last meeting?|
|Feature 2||Monetary policy goals: Focused on the Fed’s dual mandate of maximum sustainable employment and price stability.|
|Feature 3||Policy decision: What decision was made at the meeting?|
|Feature 4||Forward guidance: Communication about the likely future course of monetary policy.|
|Feature 5||The decision process: Factors the FOMC plans to consider in upcoming policy decisions.|
|Feature 6||Voting record: Who voted and how?|
For purposes of illustration only, examples below were taken from the first FOMC statement of 2019, issued on Jan. 30. You can always find the most recent statements at the Board of Governors website.
The first feature of an FOMC statement sets the stage by summarizing the state of the current U.S. economy since the previous meeting. The focus is typically on employment and inflation, given the Fed’s dual mandate of maximum employment and price stability.
Example, Jan. 30, 2019: “Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. … On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. …”
After the brief discussion of recent developments, the Fed’s dual goals are then highlighted. Recently, this statement has read as follows: “Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.”
If you’re a speed-reader who prefers to get to the point, then this is your best bet. The FOMC’s policy decision is stated here. A sentence announcing the actual decision may stand alone or be followed by another sentence highlighting the FOMC’s current monetary policy “stance” (i.e., accommodative, restrictive, etc.).
Example, Jan. 30, 2019: “In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.”
The fourth feature, in a more explicit nod to markets, is what type of action (i.e., raise, lower, or leave rates unchanged) the FOMC is leaning toward taking regarding the federal funds rate in the months ahead. This communication about future monetary policy is known as forward guidance. When central banks like the Fed provide forward guidance, individuals and businesses can use this information in making decisions about spending and investments. FOMC statements in early 2019 have stressed that “the Committee will be patient.”
Example, Jan. 30, 2019: “The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”
The fifth feature includes what factors the FOMC plans to consider in upcoming policy decisions.
Example, Jan. 30, 2019: “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”
Last but not least, after the previous paragraphs spell out the what, why and how, the last feature of an FOMC statement reveals the who. Sometimes there is unanimity on the decision. But it isn’t always unanimous, and FOMC members may dissent (choosing to vote opposite the majority).
Example, Jan. 30, 2019: “Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.”
You can learn more about dissents—and dive deeper into all things FOMC—by visiting the St. Louis Fed’s FOMC Speak, a repository of speeches, interviews, testimony and commentary by Federal Open Market Committee participants.