The tone of the October FOMC minutes is in line with Bernanke's comments yesterday night and to the hawkish side of market expectations. The minutes underline that tapering could very well begin within one of the next few meetings IF economic data continue to develop along the lines of the FOMC projections. This is no surprise, but it is interesting that the minutes note that OTHER reasons than labour market improvement could give grounds for scaling down asset purchases. This is in line with Bernanke's comments that there are costs of QE and that these increase with the size of the Fed's balance sheet. This leaves the impression that the FOMC wants to get out of QE as soon as possible.
Strengthening of the forward guidance was discussed, including lowering the unemployment threshold. Only a couple of members favoured this option though. The benefits of a lower bound for inflation were also seen as limited. In contrast, several participants favoured strengthening the forward guidance by adding qualitative guidance on the likely path of the Fed funds rate after the unemployment threshold is reached. This basically means a continuation of the current strategy of assuring that the FOMC takes other factors than just the unemployment rate into account when setting the level of the Fed funds rate and that the Fed funds rate might very well remain on hold a long time after the 6.5% unemployment rate is reached.
It was mentioned that strengthening of the forward guidance could be done when the first tapering is announced. In order to make the forward guidance more powerful, the FOMC will likely have to include some of the qualitative guidance directly in the statement. This could come in the form of a paragraph in the FOMC statement which lays out some of the other indicators, on top of the unemployment rate, that will guide the Fed's decision on the path for the Fed funds rate.
Finally, cutting the IOER (interest rate paid on excess reserves) was discussed and most members saw it as worth considering at some stage, although the benefits are likely to be modest.
To sum up, we stick to our expectation that tapering is likely to be announced at the January FOMC meeting along with some verbal strengthening of the forward guidance. At this stage, it seems unlikely that a lower unemployment threshold or a floor for inflation will be announced any time soon.
Strengthening of the forward guidance was discussed, including lowering the unemployment threshold. Only a couple of members favoured this option though. The benefits of a lower bound for inflation were also seen as limited. In contrast, several participants favoured strengthening the forward guidance by adding qualitative guidance on the likely path of the Fed funds rate after the unemployment threshold is reached. This basically means a continuation of the current strategy of assuring that the FOMC takes other factors than just the unemployment rate into account when setting the level of the Fed funds rate and that the Fed funds rate might very well remain on hold a long time after the 6.5% unemployment rate is reached.
It was mentioned that strengthening of the forward guidance could be done when the first tapering is announced. In order to make the forward guidance more powerful, the FOMC will likely have to include some of the qualitative guidance directly in the statement. This could come in the form of a paragraph in the FOMC statement which lays out some of the other indicators, on top of the unemployment rate, that will guide the Fed's decision on the path for the Fed funds rate.
Finally, cutting the IOER (interest rate paid on excess reserves) was discussed and most members saw it as worth considering at some stage, although the benefits are likely to be modest.
To sum up, we stick to our expectation that tapering is likely to be announced at the January FOMC meeting along with some verbal strengthening of the forward guidance. At this stage, it seems unlikely that a lower unemployment threshold or a floor for inflation will be announced any time soon.
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