Applying the Concept

The details of the FOMC statement change with some frequency. But the basic structure stays the same:

Beyond the announcement of the federal funds rate target itself, the most attention is given to the second and third paragraphs. The second paragraph describes the current state of the economy. The wording here matters. What is the view of current growth and inflation? Is growth “sluggish” or “robust”? Have “inflation pressures picked up” or are “increases in consumer prices … muted,” as the Committee announced on December 9, 2003?

The third paragraph focuses on the future, and its structure has been changing with some frequency. For several years, the sentences were entirely formulaic. There were just three choices: Risks were either described as “balanced,” “toward higher inflation,” or “toward lower growth.” But then, in mid-2003, the Committee began to describe the inflation and growth risks separately. Several months later, explicit statements about the pace of interest rates changes began to appear. Now, this third paragraph has been structured in a way that gives a sense of the likely direction and size of future policy changes. Are interest rates likely to go up or down? How far? How fast? And what will trigger changes? The point of the statement is to be as transparent as possible the path of policy for the next few months.

By going to the FOMC’s website at http://www.federalreserve.gov/fomc/ you can look at recent statements and see how they have been changing. What do you think the Fed will do next?

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3 percent.

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices. Labor market conditions, however, apparently continue to improve gradually. Pressures on inflation have picked up in recent months and pricing power is more evident. Longer-term inflation expectations remain well contained.

The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Edward M. Gramlich; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.+

In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

+ Because President Bush had nominated him to become the next Chair of the President’s Council of Economic Advisers, Federal Reserve rules required that Governor Ben S. Bernanke not attend this meeting. As a result, there were only 11 members voting.