The minutes from the Federal Open Market Committee (FOMC) meeting on October 29-30 show a Federal Reserve that is staying the course and still looking for evidence of a sustained improvement in the outlook for the labor market.
Participants noted that the medium term economic outlook remained relatively unchanged since their meeting in September, but "incoming data suggested growth in the second half of 2013 might prove somewhat weaker than many had previously anticipated.
" Uncertainty about fiscal policy was noted as a potential restraining factor for confidence and weakening the near-term outlook for consumer spending and business investment. Participants discussed the improvement in the unemployment rate over the last year, with some noting that it may overstate the degree of labor market improvement due to a decline in the labor force participation rate. However, others noted that in as much as the decline in labor force participation reflected increasing retirement, it would be unlikely to reverse. Others pointed to the stability of the relationship between real GDP growth and unemployment as signaling that the unemployment rate is still an accurate gauge of labor market conditions.
The discussion then turned to the communication strategy around asset purchases and forward guidance. A number of options were discussed, including adopting "a simple mechanical rule that would adjust the pace of asset purchases automatically based on a single variable such as the unemployment rate or payroll employment" or committing to a timetable for winding down the program.
With respect to forward guidance, participants discussed lowering the threshold on the unemployment rate, adding a quantitative floor on inflation, adding "additional qualitative information on the Committee's intentions regarding the federal funds rate after the unemployment threshold was reached," and lowering the interest paid on excess reserves as a way to reinforce forward guidance. "At the end of the discussion, participants agreed that it would be helpful to continue reviewing these issues of longer-run policy strategy at upcoming meetings. No decisions on the substance were taken, and participants generally noted the usefulness of planning for various contingencies.
" Key Implications These minutes did not reveal much new that hasn't already been communicated by Fed members since the September meeting. There is nothing in the minutes to suggest that the Fed is any farther than a few meetings away from tapering its asset purchase program. The economic data that has come out since the October announcement has increased the likelihood of an earlier start to tapering. Economic growth in the third quarter, which surprised expectations at 2.8%, is likely to be revised upward to above 3.0% on the second reading.
While economic growth may slow in the fourth quarter, its composition will prove more robust, with private domestic demand picking up speed. Bernanke's speech last night, which emphasized the importance of transparent communication, was echoed in these minutes. The main message was that the unemployment rate threshold of 6.5% should not be regarded as a trigger for interest rate hikes, but the start of the discussion for when they should be increased. As Bernanke put it, "even after unemployment drops below 6-1/2 percent, and so long as inflation remains well behaved, the Committee can be patient in seeking assurance that the labor market is sufficiently strong before considering any increase in its target for the federal funds rate."
" Uncertainty about fiscal policy was noted as a potential restraining factor for confidence and weakening the near-term outlook for consumer spending and business investment. Participants discussed the improvement in the unemployment rate over the last year, with some noting that it may overstate the degree of labor market improvement due to a decline in the labor force participation rate. However, others noted that in as much as the decline in labor force participation reflected increasing retirement, it would be unlikely to reverse. Others pointed to the stability of the relationship between real GDP growth and unemployment as signaling that the unemployment rate is still an accurate gauge of labor market conditions.
The discussion then turned to the communication strategy around asset purchases and forward guidance. A number of options were discussed, including adopting "a simple mechanical rule that would adjust the pace of asset purchases automatically based on a single variable such as the unemployment rate or payroll employment" or committing to a timetable for winding down the program.
With respect to forward guidance, participants discussed lowering the threshold on the unemployment rate, adding a quantitative floor on inflation, adding "additional qualitative information on the Committee's intentions regarding the federal funds rate after the unemployment threshold was reached," and lowering the interest paid on excess reserves as a way to reinforce forward guidance. "At the end of the discussion, participants agreed that it would be helpful to continue reviewing these issues of longer-run policy strategy at upcoming meetings. No decisions on the substance were taken, and participants generally noted the usefulness of planning for various contingencies.
" Key Implications These minutes did not reveal much new that hasn't already been communicated by Fed members since the September meeting. There is nothing in the minutes to suggest that the Fed is any farther than a few meetings away from tapering its asset purchase program. The economic data that has come out since the October announcement has increased the likelihood of an earlier start to tapering. Economic growth in the third quarter, which surprised expectations at 2.8%, is likely to be revised upward to above 3.0% on the second reading.
While economic growth may slow in the fourth quarter, its composition will prove more robust, with private domestic demand picking up speed. Bernanke's speech last night, which emphasized the importance of transparent communication, was echoed in these minutes. The main message was that the unemployment rate threshold of 6.5% should not be regarded as a trigger for interest rate hikes, but the start of the discussion for when they should be increased. As Bernanke put it, "even after unemployment drops below 6-1/2 percent, and so long as inflation remains well behaved, the Committee can be patient in seeking assurance that the labor market is sufficiently strong before considering any increase in its target for the federal funds rate."
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