“No decisions on the substance” of policy planning.
Yesterday’s minutes from the Federal Reserve’s October policy meeting reaffirmed the Committee’s continued commitment to maintaining the current pace of asset purchases, while exploring how a gradual change in policy might be implemented and importantly, communicated to the public. Participants “generally expected that the data would prove consistent with the Committee's outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months, [but]… also considered scenarios under which it might, at some stage, be appropriate to begin to wind down the program before an unambiguous further improvement in the outlook was apparent.” Some noted that if a reduction in purchases was predicated on information other than data that showed an improving labor market outlook, such criteria would need to be “communicate[d] effectively” and might also need to be accompanied by offsetting actions that would simultaneously provide more accommodation. If nothing else, the meeting minutes revealed a clear lack of consensus as to 1) how a removal of policy accommodation should be conveyed to the public in advance and 2) what benchmarks should be met before such removal would occur.
The Committee acknowledged the difficulty in communicating how the future trajectory of the federal funds rate might evolve, and discussed how forward guidance could be strengthened to improve clarity or even to add to policy accommodation, potentially in conjunction with a reduction in the pace of asset purchases. (One suggestion: a policy statement indicating that even after the first increase in the federal funds rate target, the Committee anticipated keeping the rate “below its longer-run equilibrium value for some time.”) Other ideas included a proposal to maintain the current target for the federal funds rate even after the unemployment rate dropped below 6.5% as long as the inflation rate was projected to run below a given level. A few participants were “favorably inclined” to implement an inflation floor, even as the benefits were viewed as “uncertain” and likely to be “rather modest.”
“Risks around the forecast” and “the gradual abatement of headwinds.”
In its economic outlook, the staff noted a number of downside risks to economic activity, including “the uncertain effects and future course of fiscal policy, concerns about the outlook for consumer spending growth, and the potential effects on residential construction of the increase in mortgage rates since the spring.” Participants noted that “the acceleration over the medium term was expected to be bolstered by the gradual abatement of headwinds that have been slowing the pace of economic recovery—such as household-sector deleveraging, tight credit conditions for some households and businesses, and fiscal restraint,” suggesting that the Committee is likely monitoring the bi-partisan plan to craft a FY2014 budget, details of which should be released before the Committee holds its final meeting of the year on December 17th-18th.
Included in the minutes from the October 29th-30th meeting was a summary of the videoconference that the Committee held on October 16th to discuss contingency issues in the event that the debt ceiling was not raised. While “meeting participants saw no legal or operational need in the event of delayed payments on Treasury securities to make changes to… open market operations, large-scale asset purchases…securities lending, or to the operation of the discount window,” they did note that under “certain circumstances” the Desk1 “might act to facilitate the smooth transmission of monetary policy through money markets,” noting the “the risks posed to the financial system and to the broader economy by a delay in payments on Treasury securities would be potentially catastrophic.” Such caution should be heeded as another debt ceiling deadline approaches in February 2014.