With the schizophrenia that seems to have availed across the FOMC members (hawks are doves, doves are hawks, tapering is not tightening, etc.) it is not surprising that the minutes reflect some confusion:
*FOMC SAW `SEVERAL SIGNIFICANT RISKS’ REMAINING FOR ECONOMY
*FED TAPER LIKELY IN COMING MONTHS ON BETTER DATA, MINUTES SHOW
*METLIFE FOUNDATION, SESAME WORKSHOP PARTNER TO PROVIDE FINL
*FOMC SAW DOWNSIDE RISKS TO ECONOMY, LABOR MARKET `DIMINISHED’
*FOMC SAW CONSUMER SENTIMENT REMAINING `UNUSUALLY LOW’
*FOMC SAW RECOVERY IN HOUSING AS HAVING `SLOWED SOMEWHAT’
So summing up – when we get to an unknown point in the future with an unknown state of parameters, we may do an unknown amount of tapering – maybe possibly. Pre-Minutes: SPX 1791, 10Y 2.75, EUR 1.3444, Gold $1262
on taper in coming months as well as a Taper even if there is no economic improvement:
During this general discussion of policy strategy and tactics, participants reviewed issues specific to the Committee’s asset purchase program. They generally expected that the data would prove consistent with the Committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trim-ming the pace of purchases in coming months. However, participants also considered scenarios under which it might, at some stage, be appropriate to begin to taper down the program before an unambiguous further improvement in the outlook was apparent.
Participants generally expressed reservations about the possibility of introducing a simple mechanical rule that would taper pace of asset purchases automatically based on a single variable such as the unemployment rate or payroll employment. While some were open to considering such a rule, others viewed that approach as unlikely to reliably produce appropriate policy out-comes. As an alternative, some participants mentioned that it might be preferable to adopt an even simpler plan and announce a total size of remaining purchases or a timetable for winding down the program. A calendar-based step-down would run counter to the data-dependent, state-contingent nature of the current asset purchase program, but it would be easier to communicate and might help the public separate the Committee’s purchase program from its policy for the federal funds rate and the overall stance of policy. With regard to future reductions in asset purchases, participants discussed how those might be split across asset classes. A number of participants believed that making roughly equal adjustments to purchases of Treasury securities and MBS would be appropriate and relatively straightforward to communicate to the public. However, some others indicated that they could back trimming the pace of Treasury purchases more rapidly than those of MBS, perhaps to signal an intention to support mortgage markets, and one participant thought that trimming MBS first would reduce the potential for distortions in credit allocation.
on lowering the IOER:
Participants also discussed a range of possible actions that could be considered if the Committee wished to signal its intention to keep short-term rates low or rein-force the forward guidance on the federal funds rate. For example, most participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage, although the benefits of such a step were generally seen as likely to be small except possibly as a signal of policy intentions. By contrast, participants expressed a range of concerns about using open market operations aimed at affecting the expected path of short-term interest rates, such as a standing purchase facility for shorter-term Treasury securities or the pro-vision of term funding through repurchase agreements. Among the concerns voiced was that such operations would inhibit price discovery and remove valuable sources of market information; in addition, such operations might be difficult to explain to the public, complicate the Committee’s communications, and appear inconsistent with the economic thresholds for the fed-eral funds rate. Nevertheless, a number of participants noted that such operations were worthy of further study or saw them as potentially helpful in some cir-cumstances.
On lowering the 6.5% unemployment rate threshold:
As part of the planning discussion, participants also examined several possibilities for clarifying or strength-ening the forward guidance for the federal funds rate, including by providing additional information about the likely path of the rate either after one of the economic thresholds in the current guidance was reached or after the funds rate target was eventually raised from its cur-rent, exceptionally low level. A couple of participants favored simply reducing the 6½ percent unemployment rate threshold, but others noted that such a change might raise concerns about the durability of the Com-mittee’s commitment to the thresholds. Participants also weighed the merits of stating that, even after the unemployment rate dropped below 6½ percent, the target for the federal funds rate would not be raised so long as the inflation rate was projected to run below a given level. In general, the benefits of adding this kind of quantitative floor for inflation were viewed as uncer-tain and likely to be rather modest, and communicating it could present challenges, but a few participants re-mained favorably inclined toward it. Several partici-pants concluded that providing additional qualitative information on the Committee’s intentions regarding the federal funds rate after the unemployment thresh-old was reached could be more helpful. Such guidance could indicate the range of information that the Com-mittee would consider in evaluating when it would be appropriate to raise the federal funds rate. Alternative-ly, the policy statement could indicate 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, as eco-nomic headwinds were likely to diminish only slowly.
Full minutes (pdf)
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