Although the Fed failed to announce tapering in September, the FOMC minutes unveiled that most policymakers expect it to begin this year. The minutes showed that the Fed decision to not taper last month was driven by the tightening in financial conditions, uncertainty over the fiscal outlook and the ambiguous economic data released since the June meeting. Meanwhile, policymakers were divided into 2 camps when considering whether to taper with the first camp mainly concerning about whether economic conditions warranted tapering while the second focused on how the tapering decision would affect the credibility of the Fed monetary stance.
The minutes indicated that some members saw financial conditions as tighter and a risk from "sizable increases in interest rates' although the intermeeting data suggested that the economy was 'expanding at a moderate pace'. Meanwhile, 'household spending and business fixed investment advanced, and the housing sector was strengthening, but mortgage rates had risen further and fiscal policy was restraining growth'. Yet, others viewed that 'cumulative progress' in labor markets since the beginning of the QE warranted reduction of stimulus. They believed that monetary policy credibility would be 'best served by announcing a downward adjustment in asset purchases' at the meeting while any postponement 'of such an announcement to later in the year or beyond could have significant implications for the effectiveness of Committee communications'.
Concerning the forward guidance, some members expressed the concerned that a 'delay could potentially undermine the credibility or predictability of monetary policy by, for example, increasing uncertainty about the Committee's reaction function and about its commitment to the forward guidance for the federal funds rate, with the result of an increase in volatility in financial markets'. The Fed members also 'discussed the potential for clarifying or strengthening the Committee's forward guidance' and the steps suggested include 'stating that the Committee would not raise its target for the federal funds rate if inflation was expected to run below a given level or providing additional information on the Committee's intentions regarding the federal funds rate after the 6.5% unemployment threshold was reached'.
Policymakers had a vigorous debate about whether to taper in September and how the process should work. It's stated in the minutes that 'a few participants expressed a preference for not cutting MBS purchases but reducing purchases only of Treasury securities initially, with the intent of continuing to support the recovery in the housing sector'. With respect to the economic projections, the minutes indicated that 'most participants viewed their economic projections as broadly consistent with a slowing in the pace of the Committee's purchases of longer term securities this year and the completion of the program in mid-2014'.
In short, the minutes were a dovish one. Yet, most member continued to expect tapering to begin later this year but economic data, especially those reflecting the labor market situation, are the deciding factors.
The minutes indicated that some members saw financial conditions as tighter and a risk from "sizable increases in interest rates' although the intermeeting data suggested that the economy was 'expanding at a moderate pace'. Meanwhile, 'household spending and business fixed investment advanced, and the housing sector was strengthening, but mortgage rates had risen further and fiscal policy was restraining growth'. Yet, others viewed that 'cumulative progress' in labor markets since the beginning of the QE warranted reduction of stimulus. They believed that monetary policy credibility would be 'best served by announcing a downward adjustment in asset purchases' at the meeting while any postponement 'of such an announcement to later in the year or beyond could have significant implications for the effectiveness of Committee communications'.
Concerning the forward guidance, some members expressed the concerned that a 'delay could potentially undermine the credibility or predictability of monetary policy by, for example, increasing uncertainty about the Committee's reaction function and about its commitment to the forward guidance for the federal funds rate, with the result of an increase in volatility in financial markets'. The Fed members also 'discussed the potential for clarifying or strengthening the Committee's forward guidance' and the steps suggested include 'stating that the Committee would not raise its target for the federal funds rate if inflation was expected to run below a given level or providing additional information on the Committee's intentions regarding the federal funds rate after the 6.5% unemployment threshold was reached'.
Policymakers had a vigorous debate about whether to taper in September and how the process should work. It's stated in the minutes that 'a few participants expressed a preference for not cutting MBS purchases but reducing purchases only of Treasury securities initially, with the intent of continuing to support the recovery in the housing sector'. With respect to the economic projections, the minutes indicated that 'most participants viewed their economic projections as broadly consistent with a slowing in the pace of the Committee's purchases of longer term securities this year and the completion of the program in mid-2014'.
In short, the minutes were a dovish one. Yet, most member continued to expect tapering to begin later this year but economic data, especially those reflecting the labor market situation, are the deciding factors.
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