January 2014 FOMC Meeting Minutes: No One to Lead Global Growth Higher

Econintersect: The 29 January 2014 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.

The meeting dialogue shows that the Fed remains divided and dysfunctional in understanding when, how much, or even if they should end their asset purchase program (see bold type below in the meeting minutes).

The best quote of these meeting minutes:

Participants generally welcomed an apparent pickup in economic growth in parts of Asia and saw reduced risk that the Chinese economy would slow abruptly, but it was noted that no economy was currently in a position to lead global growth higher.

Econintersect publishes below the views of the FOMC members, and ignores the reports given 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 their discussion of the economic situation, meeting participants indicated that they viewed the information received during the intermeeting period as suggesting that, apart from some temporary factors that had led to a pause in overall output growth in recent months, the economy remained on a moderate growth path. In particular, participants saw the economic outlook as little changed or modestly improved relative to the December meeting. Most participants judged that there had been some reduction in downside risks facing the economy: Strains in global financial markets had eased somewhat, and U.S. fiscal policymakers had come to a partial resolution of the so-called fiscal cliff. Supported by a highly accommodative stance of monetary policy, the housing sector was strengthening, and the unemployment rate appeared likely to continue its gradual decline. Nearly all participants anticipated that inflation over the medium-term would run at or below the Committee’s 2 percent objective.

In their discussion of the household sector, participants noted various factors influencing consumer spending. Some participants stated that low interest rates appeared to be contributing to strong sales of autos or, more generally, of consumer durables. It was also noted that continued deleveraging by households was improving their financial positions, which would likely support increased spending. Holiday shopping reportedly was relatively solid, and, reflecting the improvement in the housing market, demand for home furnishings and construction materials was up. However, some participants were concerned that the recent increase in the payroll tax could have a significant negative effect on spending, particularly on the part of lower-income consumers.

Participants remarked on the ongoing recovery in the housing market, pointing variously to rising house prices, growth in residential construction and sales, and the lower inventory of homes for sale. A number of participants thought it likely that higher home values and low mortgage rates were helping support other sectors of the economy as well, and a couple saw the housing market as having the potential to cause overall growth to be stronger than expected this year. Nonetheless, it was noted that mortgage credit remained tight and the fraction of homeowners with mortgage balances exceeding the value of their homes remained high.

In general, participants indicated that, relative to the recent past, more business contacts reported an improvement in confidence and some cautious optimism about the economic outlook. Anecdotal reports suggested that uncertainty about the evolution of the economy and government policy continued to restrain firms’ hiring and capital spending decisions, but the passage of fiscal legislation in early January helped resolve some of the uncertainty about federal tax policy. Moreover, it was noted that businesses were in a good position to expand once they came to view the economic environment as more favorable. Survey data from one District indicated that more than half of the respondents expected to increase employment this year, with many citing expected sales growth as the reason. Reports from a number of industries across the country also suggested a more positive assessment of future prospects, particularly in the automotive, energy, and technology sectors. However, reports from the non-automotive manufacturing sector were less positive. In agriculture, record payouts from crop insurance following last year’s drought supported farm incomes, and land prices continued to rise. Reports on business conditions in the commercial real estate sector were more mixed but, on the whole, somewhat improved. The strength of exports reportedly varied, with indications of higher demand from Mexico but some relatively pessimistic readings from firms about business conditions in Europe. Participants generally welcomed an apparent pickup in economic growth in parts of Asia and saw reduced risk that the Chinese economy would slow abruptly, but it was noted that no economy was currently in a position to lead global growth higher.

The passage of legislation in early January resolved some of the uncertainties surrounding the federal fiscal outlook, but near-term uncertainties remained, including the prospect of automatic budget cuts. Participants generally agreed that fiscal negotiations could develop in a way that would result in significantly greater drag on economic growth than in their baseline outlook. One participant noted positive news about the fiscal position of the states; in some cases, revenues had risen sufficiently to enable increases in state government spending and employment.

In their comments on labor market developments, participants viewed the decline in the unemployment rate from the third quarter to the fourth and the continued moderate gains in payroll employment as consistent with a gradually improving job market. However, the unemployment rate remained well above estimates of its longer-run normal level, and other indicators, such as the share of long-term unemployed and the number of people working part time for economic reasons, suggested that the recovery in the labor market was far from complete. One participant reported that firms in his District continued to have difficulty finding workers with suitable skills, suggesting that labor market mismatch was a factor deterring job growth. A few others, however, pointed to evidence that weak aggregate demand was the primary factor restraining job growth, citing data and analyses in support of the view that there was still a substantial margin of slack in the labor market. For example, a couple of participants noted evidence suggesting that a shift in the relationship between the unemployment rate and the level of job vacancies in recent years was unlikely to persist as the economy recovered and unemployment benefits returned to customary levels. Similarly, one participant cited empirical analysis showing that employment growth was lower in the states where a greater share of small businesses identified lack of demand as their most important business problem. Several participants expressed concern that continuation of only slow job growth and persistently high long-duration unemployment could lead to permanent damage to the labor market.

Participants generally saw recent price developments as consistent with their projections that inflation would remain at or below the Committee’s 2 percent objective over the medium run. There was little evidence of wage or cost pressures outside of isolated sectors, and measures of inflation expectations remained stable. However, a few participants expressed concerns that the current highly accommodative stance of monetary policy posed upside risks to inflation in the medium or longer term.

Participants also touched on the implications for monetary policy of changes in estimates of the economy’s potential output. A number of participants thought that the growth of potential output had been reduced in recent years, possibly in part because restrictive financial conditions and weak economic activity in the aftermath of the financial crisis had reduced investment, business formation, and the pace of adoption of new technologies. Many of these participants worried that, should the economy continue to operate below potential for too long, reduced investment and underutilization of labor could further undermine the growth of potential output over time. A couple of participants noted that uncertainties concerning both the level of, and the source of shifts in, potential output made it difficult to base decisions about monetary policy on real-time measures of the output gap.

Participants noted that financial conditions appeared to have been supported by the recent fiscal agreement, a perceived reduction in the risk that the debt ceiling would not be raised in a timely manner, accommodative monetary policy, and actions taken by European authorities. With regard to Europe, participants continued to see downside risks to growth emanating from that region, given its unresolved imbalances and weak economic outlook. Several participants mentioned that domestic credit conditions appeared to have improved: Automobile loans were expanding rapidly and it was reported that competition to make commercial and industrial loans was robust. Although mortgage availability was still limited, a couple of participants indicated that they expected increased competition to bring about some lessening of the restraints on mortgage credit. In general, after having been depressed for some time, investor appetite for risk had increased. A few participants commented that the Committee’s accommodative policies were intended in part to promote a more balanced approach to risk-taking, but several others expressed concern about the potential for excessive risk-taking and adverse consequences for financial stability. Some participants mentioned the potential for a sharp increase in longer-term interest rates to adversely affect financial stability and indicated their interest in further work on this topic.

The Committee again discussed the possible benefits and costs of additional asset purchases. Most participants commented that the Committee’s asset purchases had been effective in easing financial conditions and helping stimulate economic activity, and many pointed, in particular, to the support that low longer-term interest rates had provided to housing or consumer durable purchases. In addition, the Committee’s highly accommodative policy was seen as helping keep inflation over the medium term closer to its longer-run goal of 2 percent than would otherwise have been the case. Policy was also aimed at improving the labor market outlook. In this regard, several participants stressed the economic and social costs of high unemployment, as well as the potential for negative effects on the economy’s longer-term path of a prolonged period of underutilization of resources. However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy. A few also raised concerns about the potential effects of further asset purchases on the functioning of particular financial markets, although a couple of other participants noted that there had been little evidence to date of such effects. In light of this discussion, the staff was asked for additional analysis ahead of future meetings to support the Committee’s ongoing assessment of the asset purchase program.

Several participants emphasized that the Committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved. For example, one participant argued that purchases should vary incrementally from meeting to meeting in response to incoming information about the economy. A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred. Several others argued that the potential costs of reducing or ending asset purchases too soon were also significant, or that asset purchases should continue until a substantial improvement in the labor market outlook had occurred. A few participants noted examples of past instances in which policymakers had prematurely removed accommodation, with adverse effects on economic growth, employment, and price stability; they also stressed the importance of communicating the Committee’s commitment to maintaining a highly accommodative stance of policy as long as warranted by economic conditions. In this regard, a number of participants discussed the possibility of providing monetary accommodation by holding securities for a longer period than envisioned in the Committee’s exit principles, either as a supplement to, or a replacement for, asset purchases.

Participants also discussed the economic thresholds in the Committee’s forward guidance on the path of the federal funds rate. On the whole, participants judged that financial markets had adapted to the shift from date-based communication to guidance based on economic thresholds without difficulty, although a few participants stated that communications challenges remained. For example, one participant commented that some market participants appeared to have incorrectly interpreted the thresholds as triggers that, when reached, would necessarily lead to an immediate rise in the federal funds rate. A couple of participants noted that this policy tool would be more effective if the Committee were able to communicate a consensus expectation for the path of the federal funds rate after a threshold was crossed. One participant also indicated a preference for lowering the threshold for the unemployment rate as a means of providing additional accommodation.

Steven Hansen

Source: Federal Reserve