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June 2013 FOMC Meeting Minutes: Much Discussion on Ending QE

July 11th, 2013
in econ_news, syndication

Fed-sealSMALLEconintersect: The 19 June 2013 meeting statement presented the actions taken. This post covers the economic discussion during this FOMC meeting between the members. The Fed's Balance Sheet (which we report on weekly) continues to grow at record levels.

Much of the meeting dialogue concerned communicating the way to succinctly communicate how the Fed was going to "exit" quantitative easing (QE), and some of the effects of exiting:

A couple of participants expressed concerns that some financial institutions might not be well positioned to weather a rapid run-up in interest rates. Two others emphasized the importance of bolstering the resilience of money market funds against disorderly outflows. And a few stated their view that a prolonged period of low interest rates would encourage investors to take on excessive credit or interest rate risk and would distort some asset prices. However, others suggested that the recent rise in rates might have reduced such incentives.

Specific participant discussions follows.

Follow up:

Econintersect publishes below the views of the FOMC members, and does not go over the reports to the members. We are looking for a glimpse of insight into the minds of the FOMC members.

Participants' Views on Current Conditions and the Economic Outlook

In conjunction with this FOMC meeting, meeting participants--the 7 members of the Board of Governors and the presidents of the 12 Federal Reserve Banks, all of whom participate in the deliberations of the FOMC--submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2013 through 2015 and over the longer run, under each participant's judgment of appropriate monetary policy. [editor's note: these graphics can be see in the post of the meeting statement] The longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These economic projections and policy assessments are described in the Summary of Economic Projections, which is attached as an addendum to these minutes.

In their discussion of the economic situation, meeting participants generally indicated that the information received during the intermeeting period continued to suggest that the economy was expanding at a moderate pace. A number of participants mentioned that they were encouraged by the apparent resilience of private spending so far this year despite considerable downward pressure from lower government spending and higher taxes. In particular, consumer spending rose at a moderate rate, and the housing sector continued to strengthen. Business investment advanced, although only modestly, and slower economic activity abroad restrained domestic production. Overall conditions in the labor market improved further in recent months, although the unemployment rate remained elevated. Inflation continued to run below the Committee's longer-run objective, but longer-term inflation expectations remained stable.

Most participants anticipated that growth of real GDP would pick up somewhat in the second half of 2013. Growth of economic activity was projected to strengthen further during 2014 and 2015, supported by accommodative monetary policy; waning fiscal restraint; and ongoing improvements in household and business balance sheets, credit availability, and labor market conditions. Accordingly, the unemployment rate was projected to gradually decline toward levels consistent with the Committee's dual mandate. Many participants saw the downside risks to the medium-run outlook for the economy and the labor market as having diminished somewhat in recent months, or expressed greater confidence that stronger economic activity was in train. However, some participants noted that they remained uncertain about the projected pickup in growth of economic activity in coming quarters, and thus about the prospects for further improvement in labor market conditions, given that, in recent years, forecasts of a sustained pickup in growth had not been realized.

Participants noted that consumer spending continued to increase at a moderate rate in recent months despite tax increases and only modest gains in wages. Among the factors viewed as supporting consumption were improvements in household balance sheets and in the job market, as well as low interest rates. In addition, consumer sentiment improved over the intermeeting period, which some participants attributed to rising house prices and gains in the stock market. It was noted that the mutually reinforcing dynamic of rising confidence, declining risk premiums, improving credit availability, increasing spending, and greater hiring was an important factor in the projected pickup in economic activity but also that this favorable dynamic could be vulnerable to an adverse shock. A few participants expressed some concern about the outlook for consumer spending, citing the weakness in labor income and households' cautious attitudes toward using debt.

Housing markets continued to strengthen, with participants variously reporting increases in house prices, sales, and building permits; low inventories of homes on the market; and rising demand for construction supplies. The improvement in the housing sector was seen as supporting the broader economy through related spending and employment, with rising real estate values boosting household wealth, confidence, and access to credit. Participants generally were optimistic that the recovery in housing activity would be sustained, although a couple of participants were concerned that the run-up in mortgage rates in recent weeks might begin to crimp demand. However, the recent increase in mortgage purchase applications was seen as suggesting that the demand for housing was being driven by factors beyond low mortgage rates.

Reports on business spending were mixed. A number of participants continued to hear that businesses were limiting their capital spending to projects intended to enhance productivity and that they remained reluctant to invest to expand capacity, or to step up hiring. Uncertainties about regulatory issues and fiscal policies as well as weak economic activity abroad were cited as factors weighing on business decisionmaking. Some businesses, particularly smaller firms, were again reported to be concerned about the implications of new health-care regulations for their labor costs. Nonetheless, a few participants reported that their business contacts expressed somewhat greater confidence in the economic outlook or reported plans to expand capacity. A pickup in bank lending to small businesses was also reported. Although the manufacturing sector slowed considerably during the spring, contacts in several Districts reported that activity turned up more recently. Reports on activity in the airline, trucking, and warehousing industries were uneven. Agriculture remained robust, supported in part by strong demand from emerging market economies. However, prospects for farm income were less positive as a result of the wet weather in the Midwest and expectations of lower prices for corn. The outlook for the energy sector remained positive.

While the federal sequestration and the tax increases that became effective earlier in the year were expected to be a substantial drag on economic activity this year, the magnitude and timing of the effects remained unclear. Several participants commented that the direct effects of the cutbacks in federal spending, to date, did not appear as great as had been expected, but that they anticipated that fiscal policy would continue to restrain economic growth in coming quarters. In particular, one pointed out that the furloughs scheduled for the second half of the year were likely to reduce household income and spending. A report on the favorable fiscal condition of one state was indicative of the improvement in the budget situation at state and local governments.

Participants generally agreed that labor market conditions had continued to improve, on balance, in recent months; many saw the cumulative decline in the unemployment rate and gains in nonfarm payrolls over the past nine months as considerable. Reflecting these developments, participants' forecasts for the unemployment rate at this meeting were lower than those prepared for the September 2012 meeting. Among the encouraging aspects of labor market developments since then were the step-up in average monthly gains in private employment, the breadth of job gains across industries, the decline in layoffs, and a rise in voluntary quits in some industries. However, some participants discussed a number of indicators that suggested that the improvement in broad labor market conditions was less than might be implied by the decline in the unemployment rate alone. Some pointed out that the rate of hiring still fell short of the pace that they saw as consistent with more-noticeable progress in labor market conditions, that a portion of the improvement in payroll employment since the September meeting was due to data revisions, or that there were no signs of an increase in wage pressures. Others expressed concern about the still-elevated level of long-duration joblessness and the weakness in labor force participation. Most participants still saw slack remaining in the labor market, although they differed on the extent to which the progress to date had reduced that slack and how confident they were about future labor market improvement.

Inflation was low in the months prior to the meeting, with the trends in all broad measures remaining below the Committee's 2 percent longer-run objective. Several transitory factors, including a one-time reduction in Medicare costs, contributed to the recent very low inflation readings. In addition, energy prices declined, and nonfuel commodity prices were soft. Over the past year, both core and overall consumer price inflation trended lower; participants cited various alternative measures of consumer price inflation, including the trimmed mean PCE and CPI as well as the sticky price CPI, that suggested that the slowing was broad based. Market-based measures of inflation expectations decreased over the intermeeting period but remained within their ranges over the past few years. Most participants expected inflation to begin to move up over the coming year as economic activity strengthened, but many anticipated that it would remain below the Committee's 2 percent objective for some time. One participant expressed concern about the risk of a more rapid rise in inflation over the medium term, given the highly accommodative stance of monetary policy. In contrast, many others worried about the low level of inflation, and a number indicated that they would be watching closely for signs that the shift down in inflation might persist or that inflation expectations were persistently moving lower.

In their discussion of financial market developments over the intermeeting period, participants weighed the extent to which the rise in market interest rates and increase in volatility reflected a reassessment of market participants' expectations for monetary policy and the extent to which it reflected growing confidence about the economic outlook. It was noted that corporate credit spreads had not widened substantially and that the stock market had posted further gains, suggesting that the higher rates reflected, at least in part, increasing confidence that moderate economic growth would be sustained. Several participants worried that higher mortgage rates and bond yields could slow the recovery in the housing market and restrain business expansion. However, some others commented that any adverse effects of the increase in rates on financial conditions more broadly appeared to be limited.

A number of participants offered views on risks to financial stability. A couple of participants expressed concerns that some financial institutions might not be well positioned to weather a rapid run-up in interest rates. Two others emphasized the importance of bolstering the resilience of money market funds against disorderly outflows. And a few stated their view that a prolonged period of low interest rates would encourage investors to take on excessive credit or interest rate risk and would distort some asset prices. However, others suggested that the recent rise in rates might have reduced such incentives. While market volatility had increased of late, it was noted that the rise in measured volatility, while noticeable, occurred from a low level, and that a broad index of financial stress remained below average. One participant felt that the Committee should explore ways to calibrate the magnitude of the risks to financial stability so that those considerations could be more fully incorporated into deliberations on monetary policy.

Participants discussed how best to communicate the Committee's approach to decisions about its asset purchase program and how to reduce uncertainty about how the Committee might adjust its purchases in response to economic developments. Importantly, participants wanted to emphasize that the pace, composition, and extent of asset purchases would continue to be dependent on the Committee's assessment of the implications of incoming information for the economic outlook, as well as the cumulative progress toward the Committee's economic objectives since the institution of the program last September. The discussion centered on the possibility of providing a rough description of the path for asset purchases that the Committee would anticipate implementing if economic conditions evolved in a manner broadly consistent with the outcomes the Committee saw as most likely. Several participants pointed to the challenge of making it clear that policymakers necessarily weigh a broad range of economic variables and longer-run economic trends in assessing the outlook. As an alternative, some suggested providing forward guidance about asset purchases based on numerical values for one or more economic variables, broadly akin to the Committee's guidance regarding its target for the federal funds rate, arguing that such guidance would be more effective in reducing uncertainty and communicating the conditionality of policy. However, participants also noted possible disadvantages of such an approach, including that such forward guidance might inappropriately constrain the Committee's decisionmaking, or that it might prove difficult to communicate to investors and the general public.

Since the September meeting, some participants had become more confident of sustained improvement in the outlook for the labor market and so thought that a downward adjustment in asset purchases had or would likely soon become appropriate; they saw a need to clearly communicate an intention to lower the pace of purchases before long. However, to some other participants, this approach appeared likely to limit the Committee's flexibility in adjusting asset purchases in response to changes in economic conditions, which they viewed as a key element in the design of the purchase program. Others were concerned that stating an intention to slow the pace of asset purchases, even if the intention were conditional on the economy developing about in line with the Committee's expectations, might be misinterpreted as signaling an end to the addition of policy accommodation or even be seen as the initial step toward exit from the Committee's highly accommodative policy stance. It was suggested that any statement about asset purchases make clear that decisions concerning the pace of purchases are distinct from decisions concerning the federal funds rate.

Participants generally agreed that the Committee should provide additional clarity about its asset purchase program relatively soon. A number thought that the postmeeting statement might be the appropriate vehicle for providing additional information on the Committee's thinking. However, some saw potential difficulties in being able to convey succinctly the desired information in the postmeeting statement. Others noted the need to ensure that any new statement language intended to provide more information about the asset purchase program be clearly integrated with communication about the Committee's other policy tools. At the conclusion of the discussion, most participants thought that the Chairman, during his postmeeting press conference, should describe a likely path for asset purchases in coming quarters that was conditional on economic outcomes broadly in line with the Committee's expectations. In addition, he would make clear that decisions about asset purchases and other policy tools would continue to be dependent on the Committee's ongoing assessment of the economic outlook. He would also draw the distinction between the asset purchase program and the forward guidance regarding the target for the federal funds rate, noting that the Committee anticipates that there will be a considerable time between the end of asset purchases and the time when it becomes appropriate to increase the target for the federal funds rate.

 

Steven Hansen

Source: Federal Reserve

 









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