The Federal Open Market Committee (FOMC) participants viewed the information received during the period since the September 2013 FOMC meeting as indicating that economic activity expanded "at a moderate pace," but noted that "incoming data suggested growth in the second half of 2013 might prove somewhat weaker" than previously anticipated. Participants expected the direct effect of the 16-day government shutdown at the beginning of October to be "temporary and limited," but some expressed concern about the potential effect to business and consumer confidence from "repeated fiscal impasses." While a number of participants regarded the September payroll employment report as "somewhat disappointing," they noted that labour markets "continued to improve, albeit slowly." Inflation remained below the Committee's long-run objective while inflation expectations remained stable but below 2% "by some measures."
Financial conditions were noted to have "eased notably" since the previous meeting, although longer-term rates remain "well above their levels in the spring." When discussing market reactions to the Committee's decisions in June and September, participants noted that interest rate movements suggest financial markets see a close link between asset purchases and forward guidance regarding the fed funds rate. Some participants saw the decline in rates following the September meeting, which brought the path of short-term rates "more closely into alignment" with forward guidance, as implying increased credibility of monetary policy.
In the discussion of monetary policy, participants generally expected upcoming employment data would be consistent with the Committee's expectations for an "ongoing improvement in labour market conditions and would thus warrant trimming the pace of purchases in coming months." Some participants even suggested tapering the pace of asset purchases before seeing an "unambiguous improvement" in labour market conditions. It was suggested that, in this case, "alternative actions to proved accommodation" might be required to offset the effect of reduced purchases. Participants expressed reservations about the possibility of introducing a mechanical rule to tie the pace of purchases to labour market data. Some participants suggested announcing a total size of remaining purchases or a timetable for reducing the pace of purchases, but it was noted that such a strategy would be inconsistent with the Committee's data dependent stance.
When the Committee begins to taper the pace of purchases, a number of participants expressed a preference to make equal adjustments to Treasury and MBS purchases, while others indicated that trimming the pace of Treasury purchases more rapidly would "signal an intention to support mortgage markets." One participant favoured reducing MBS purchases first to "reduce the potential for distortions in credit allocation."
Turning to forward guidance, participants discussed providing additional information on the likely path of the fed funds rate once the current unemployment target was reached and once the funds rate was raised from its current, exceptionally low level. Some participants favoured lowering the unemployment threshold from the current 6.5%, while additional guidance, such as a commitment to keep rates low as long as inflation remained below a certain threshold, was also discussed. Several participants favoured providing additional qualitative guidance on the path of the fed funds rate once the employment threshold was reached, such as laying out the range of information the Committee would consider in deciding when to raise the rate. It was suggested that these modifications to forward guidance could be used to "add to policy accommodation, perhaps in conjunction with a reduction in the pace of asset purchases."
The minutes indicate that the Committee's decision to maintain the pace of asset purchases in October reflected concerns that growth in the second half of the year would be slightly slower than previously anticipated. The Committee emphasized scope for enhancement to policy communication; however, consensus on the main thresholds remained intact. This is consistent with our expectation for the fed funds rate to remain in the current, exceptionally low range of 0.00 to 0.25% into 2015. Nonetheless, the ongoing improvement in labour markets as indicated by the October nonfarm payroll report and upward revision to September employment gain will likely result in the Fed beginning to taper its asset purchases in March 2014.
Financial conditions were noted to have "eased notably" since the previous meeting, although longer-term rates remain "well above their levels in the spring." When discussing market reactions to the Committee's decisions in June and September, participants noted that interest rate movements suggest financial markets see a close link between asset purchases and forward guidance regarding the fed funds rate. Some participants saw the decline in rates following the September meeting, which brought the path of short-term rates "more closely into alignment" with forward guidance, as implying increased credibility of monetary policy.
In the discussion of monetary policy, participants generally expected upcoming employment data would be consistent with the Committee's expectations for an "ongoing improvement in labour market conditions and would thus warrant trimming the pace of purchases in coming months." Some participants even suggested tapering the pace of asset purchases before seeing an "unambiguous improvement" in labour market conditions. It was suggested that, in this case, "alternative actions to proved accommodation" might be required to offset the effect of reduced purchases. Participants expressed reservations about the possibility of introducing a mechanical rule to tie the pace of purchases to labour market data. Some participants suggested announcing a total size of remaining purchases or a timetable for reducing the pace of purchases, but it was noted that such a strategy would be inconsistent with the Committee's data dependent stance.
When the Committee begins to taper the pace of purchases, a number of participants expressed a preference to make equal adjustments to Treasury and MBS purchases, while others indicated that trimming the pace of Treasury purchases more rapidly would "signal an intention to support mortgage markets." One participant favoured reducing MBS purchases first to "reduce the potential for distortions in credit allocation."
Turning to forward guidance, participants discussed providing additional information on the likely path of the fed funds rate once the current unemployment target was reached and once the funds rate was raised from its current, exceptionally low level. Some participants favoured lowering the unemployment threshold from the current 6.5%, while additional guidance, such as a commitment to keep rates low as long as inflation remained below a certain threshold, was also discussed. Several participants favoured providing additional qualitative guidance on the path of the fed funds rate once the employment threshold was reached, such as laying out the range of information the Committee would consider in deciding when to raise the rate. It was suggested that these modifications to forward guidance could be used to "add to policy accommodation, perhaps in conjunction with a reduction in the pace of asset purchases."
The minutes indicate that the Committee's decision to maintain the pace of asset purchases in October reflected concerns that growth in the second half of the year would be slightly slower than previously anticipated. The Committee emphasized scope for enhancement to policy communication; however, consensus on the main thresholds remained intact. This is consistent with our expectation for the fed funds rate to remain in the current, exceptionally low range of 0.00 to 0.25% into 2015. Nonetheless, the ongoing improvement in labour markets as indicated by the October nonfarm payroll report and upward revision to September employment gain will likely result in the Fed beginning to taper its asset purchases in March 2014.
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