July FOMC Minutes: Key Take-Aways

Economic Pulse
July 10, 2014
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The minutes released Wednesday from June’s Federal Reserve meeting highlighted a wide degree of uncertainty as to the timing of any eventual increase in the main policy rate, even as the Committee provided the first indication that their asset purchase program is likely to end after its October 29th meeting. Reflecting the range of possible outcomes was the use of the word “might” in the minutes—policy “might be adjusted,” changes “might be appropriate,” etc., — a total of 12 times. Note that Committee has several other monetary policy tools it is likely to use in tandem with any changes to the Federal Funds rate; watch for more discussion of interest on excess reserves and reverse repos to come, particularly as “it was observed that it would be useful for the Committee to develop and communicate its plans to the public later this year, well before the first steps in normalizing policy become appropriate.”

ASSET PURCHASES: Likely to end after October’s meeting

"While the current asset purchase program is not on a preset course, participants generally agreed that if the economy evolved as they anticipated, the program would likely be completed later this year…. If the economy progresses about as the Committee expects, warranting reductions in the pace of purchases at each upcoming meeting, this final reduction would occur following the October meeting."

AFTER ASSET PURCHASES END: What about MBS and Treasury coupon reinvestments?

"Many participants agreed that ending reinvestments at or after the time of liftoff [of the Federal Funds rate] would be best, with most of these participants preferring to end them after liftoff."

RATE HIKES: "[Not until a] considerable time after the asset purchase program ends"

"The Committee again stated that it currently anticipated that it likely would be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continued to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remained well anchored. The forward guidance also reiterated the Committee's expectation that even after employment and inflation are near mandate-consistent levels,economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."

POLICY NORMALIZATION: Other tools besides the federal funds rate "Consideration of this topic...did not imply that normalization would necessarily begin soon."

“Most participants agreed that adjustments in the rate of interest on excess reserves1 (IOER) should play a central role during the normalization process. It was generally agreed that an ON RRP2 [overnight reverse repo] facility with an interest rate set below the IOER rate could play a useful supporting role by helping to firm the floor under money market interest rates.”


“…circumstances that might entail either a slower or a more rapid removal of policy accommodation were cited. For example, a number of participants noted their concern that a more gradual approach might be appropriate if forecasts of above-trend economic growth later this year were not realized. And a couple suggested that the Committee might need to strengthen its commitment to maintain sufficient policy accommodation to return inflation to its target over the medium term in order to prevent an undesirable decline in inflation expectations.”

“Alternatively, some other participants expressed concern that economic growth over the medium run might be faster than currently expected or that the rate of growth of potential output might be lower than currently expected, calling for a more rapid move to begin raising the federal funds rate in order to avoid significantly overshooting the Committee's unemployment and inflation objectives.”


The minutes provided a look at the historical standard deviations (or the root mean squared errors) of past private sector and government forecasts. Based on the accuracy of forecasts made over the 1994 - 2013 period, the standard deviation around GDP forecasts made two to ten quarters into the future has been 1.4 - 2.1 percentage points, for example.

Average Historical Forecast Errors

Average Historical Forecast Errors

If we assume that the uncertainty attending current projections is similar to that experienced in the past and the risks around the projections are broadly balanced, then combining the midpoint of the Federal Reserve’s June “central tendency” forecasts for GDP3 with the Fed’s historical forecast accuracy produces a fairly wide confidence interval for 2014-2016 growth forecasts, as shown below.

Federal Reserve Just 2014 GDP Forecasts,
With 68% Confidence Interval

Federal Reserve June 2014 GDP Forecasts
Source: Federal Reserve Board and Savills Studley

With probabilistic ranges for GDP as wide as those above, one can see why the timing of eventual rate hikes is somewhat hazy, with policy “not on a pre-set course.”

1The rate of interest that the Fed pays banks on the reserves they hold with the Federal Reserve System. The IOER rate is currently set at 25 basis points.
2Under a reverse repo, the Federal Reserve Bank of New York’s Trading Desk sells a security under an agreement to repurchase that security in the future. A reverse repo, a form of collateralized borrowing, temporarily removes cash from the system.