The key takeaways from the FOMC statement on Wednesday were that rates weren’t raised, the Fed plans to unwind the balance sheet starting in September, and the Fed downgraded its inflation comments as it slowly acknowledges that inflation hasn’t been as strong as it had been claiming it was earlier in the year. It’s interesting to see that CNBC decided to call the Fed’s asset purchases ‘stimulus.’ It’s weird to call it a stimulus which took the economy out of a recession when it continued until 2014. In what world is stimulus used 6 years into a recovery? The Fed has changed its definition of what QE was to fit whatever narrative it’s promoting. The Fed has said in the past that QE wasn’t effecting the economy. As you can see from the quote below, the Fed has said there’s no link between QE and inflation and real economic growth. That’s not a stimulus.

I will now go through the changes in the language of the statement and then I’ll review the statement’s effect on the markets. The first change was eliminating the claim that job gains have moderated. That is because July’s BLS report showed 222,000 jobs created. That increase was helped by the local government hiring excess workers, but it was still a good report. The March report showed 50,000 jobs created and the May report showed 152,000 in job growth which is why the moderate moniker was in the previous statement. The Fed also eliminated the fact that household spending had picked up in recent months. This concludes that consumer spending has been consistent. The Fed is clearly ignoring the tick up in consumer credit defaults. To be clear, I’m not saying it should mention that. I can mention every change in prices, but the Fed can’t do so because these reactions will look like policy changes.

That’s why the Fed has missed the disinflation. It didn’t want to mention it in case it was a temporary change. Also saying inflation is declining messes with the guidance for rates to be raised 3 times this year. That’s why the Fed chose to ignore the data for a few months; that has changed in recent statements. In this statement, the Fed got rid of the word “recently” to describe the declines in inflation. That’s a dovish statement which acknowledges the declines have continued. It’s now a trend opposed to a transitory change. The Fed also removed the word “somewhat” in regards to inflation being below 2%. This new language is more bearish on inflation, once again making the dovish point that inflation has fallen.