The Federal Open Market Committee unusually decided not to offer a statement of how the risks balanced out in January, and Mr. Williams argued that may in any case be “a better place to be” than trying to issue one-sentence statement on risks. The Fed, he said, should not load too much into its post-meeting statements.

We dropped the reference to balance on the risks -- that was deliberate -- which should send a signal that we are assessing non-U.S. economic conditions, global financial conditions and the impact of both of those on underlying U.S. economic conditions

As a consequence of observing this process for 10 years, I have concluded that an FOMC attempt to provide forward guidance in the policy statement causes more communications difficulties than it solves.  A key reason is that the economy is subject to more shocks and reversals than one might think. ... Directional language tends to remain in the FOMC policy statement beyond the time it applies and removing the language creates the possibility of miscommunication.  Every change in the policy statement leads naturally to market questions as to what the change means and whether the change is meant to provide a hint about the future direction of policy.  To my mind, every time new language is inserted into the policy statement, there needs to be as much thought given as to how to exit from the language as to the rationale for inserting it. 

I like the way we came out in the last statement, similar to the statement in September: an agnostic view of the balance of risks. I have some concerns about our use of this balance of risks language. It has served a purpose at times but can also put the committee in an awkward position. Markets often use our balance of risks to infer something about what they think the path of the funds rate is going to be and that is not I believe the best way to do business. I would like us to be more
explicit about how the evolution of the economy impacts our decisions, rather than signaling the path of the funds rate.

The circumstances have focused my attention on this language issue, particularly in the balance of risks and I suspect people are struggling right now with, `Okay, maybe we have to think through this a little more carefully than we had before.’ In the current circumstance it makes sense [not to state the balance of risks] and I’m thinking about what else can we say that might improve our communications.

I'd say it would be more accurate to say we are looking for a bit more flexibility, given the uncertainties that we are facing and the risks that are occurring on both sides of our outlook.

An additional point. We, in general, this is more technical, but we, in general, prefer not to give advance rate guidance, that is, not to tell the market we're going to do this, that and the other. Rather, it's better for the FOMC to describe our outlook and the risks that we see for the outlook and let the markets make their own determination about how to price assets. One aspect of this change has been to move away from forward rate guidance, which we view as being something that should be undertaken mostly under unusual circumstances.

...

Our statement included a description both of the situation on the real side of the economy and on the inflation side and our sense was both, that the risks had increased on both sides, that the outlook for output was a bit weaker, as we indicated in our statement, but that, also, the inflation situation had become slightly riskier, as well. And so both sides of the mandate have -- are facing somewhat greater risks.

From the Q&A session

As I sit at the FOMC table, I continue to fret more about inflation than I do about growth. While I am well aware of the risks to economic growth, the history of inverted yield curves, and the ever present possibility of exogenous shocks in a politically hazardous world, the “balance of risk,” in my book, is still tilted to the inflation side of the equation.

After the January 2000 FOMC meeting the policy “bias” in the press release was dropped in favor of a “balance-of-risks” assessment.  The statement following the September 2004 FOMC meeting read as follows: “The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters to be roughly equal.”  To provide guidance on its thinking, the Committee might assess the risk of achieving one or the other, or both, of the goals to be tilted to the upside or downside.

Adoption of the balance-of-risks language reflected the Committee’s effort to avoid confusion about the interpretation of the wording of the “bias” statement which specifically referred to the “intermeeting period.”  The replacement balance-of-risks statement focuses on providing insight into the Committee’s assessment of the outlook for future real growth and inflation, but falls short of providing a full fledged forecast of the economy...