The Two Words That Made The Fed’s Statement Dovish

Wednesday’s policy announcement from the Fed was “dovish” because of these two words: substantially and international.

A “dovish” stance implies that the Fed will be more cautious in looking to raise rates. In contrast a “hawkish” stance would’ve indicated at a Fed that is more willing to be aggressive in looking to tighten financial conditions.

In Wednesday’s statement, the Fed said: “Market-based measures of inflation compensation have declined substantially in recent months.”

In December, the Fed said: “Market-based measures of inflation compensation have declined somewhat further.”

On Twitter, Deutsche Bank economist Joe LaVorgna said that this language change indicated a dovish tilt in the Fed’s thinking.

Another change was the Fed’s acknowledgment, however slight, of international concerns or developments that could impact its plans.

In its statement on Wednesday, the Fed said: “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.”

In December, the Fed said: “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 developments.”

Bloomberg’s Carl Riccadonna first pointed us to this change.

Ahead of the Fed’s announcement, analysts at Credit Suisse said that, “A dovish innovation would be any explicit reference to downside risks from global economic conditions.”

We can quibble over whether the Fed’s language change marks an “explicit reference to downside risks from global economic conditions,” but that the Fed is at least acknowledging international conditions abroad is a new development.

Next month, we’ll get more details about what the Fed really considered with respect to international developments in the Minutes from this meeting.

Following the Fed’s statement, markets moved higher but have since reversed and are basically unchanged.

Not a ton to go on with no press conference, but given the importance that central bank policy now has in markets, it is worth close-reading the Fed’s statement to see what changed.

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