While the timing of tapering is still an open question, nothing in the minutes warrants our changing our
longstanding call for a modest cutback in the pace of monthly asset purchases on September 18, possibly
by $20bn to $65bn per month.
In late July, there was a wide array of views among the 19 FOMC participants on the economic outlook,
inflation prospects, and the reasons interest rates rose since June. But, importantly, the July 30-31 FOMC
minutes noted:
“…almost all participants confirmed that they were broadly comfortable with the characterization of
the contingent outlook for asset purchases that was presented in the June postmeeting press
conference and in the July monetary policy testimony.”
(Note that “participants” are all 19 officials on the FOMC. “Members” would be only the 12 voting members
on the Committee this year.)
This contingent outlook was the following: “…if economic conditions improved broadly as expected, the
Committee would moderate the pace of its securities purchases later this year. And if economic conditions
continued to develop broadly as anticipated, the Committee would reduce the pace of purchases in
measured steps and conclude the purchase program around the middle of 2014. At that point, if the
economy evolved along the lines anticipated, the recovery would have gained further momentum,
unemployment would be in the vicinity of 7 percent, and inflation would be moving toward the Committee's
2 percent objective.”
There were a “few” participants who, while comfortable with the plan in general, “stressed the need to avoid
putting too much emphasis on the 7 percent value for the unemployment rate, which they saw only as
illustrative of conditions that could obtain at the time when the asset purchases are completed.”
Since July 31, to the extent they have revealed their preferences and expectations, Fed speakers have
generally left the door open for a taper announcement at the September 17-18 FOMC meeting (which is
still our forecast). St. Louis Fed President Bullard, a voter this year, appears to be an exception; he doesn’t
seem confident that the economy is “improving in the way we need.”
If they were so “comfortable,” why not put it in writing?
Recall that the July 31 policy statement said nothing about this contingent tapering plan. The debate about
this was among most, many, and a few of the 19 participants:
“Most participants saw the provision of such information, which would reaffirm the contingent outlook
presented following the June meeting, as potentially useful; however, many also saw possible difficulties,
such as the challenge of conveying the desired information succinctly and with adequate nuance…A few
participants saw other forms of communication as better suited for this purpose.”
But in the end, what really mattered is what the 12 voting “members” of the Committee thought:
“The Committee also considered whether to add more information concerning the contingent outlook for
asset purchases to the policy statement, but judged that doing so might prompt an unwarranted shift in
market expectations regarding asset purchases.“
Forward guidance discussion further highlights the challenges of transparency
“In general, there was support for maintaining the current numerical thresholds in the forward guidance. A
few participants expressed concern that a decision to lower the unemployment threshold could
potentially… [call] into question the credibility of the thresholds and undermining their effectiveness.
��
longstanding call for a modest cutback in the pace of monthly asset purchases on September 18, possibly
by $20bn to $65bn per month.
In late July, there was a wide array of views among the 19 FOMC participants on the economic outlook,
inflation prospects, and the reasons interest rates rose since June. But, importantly, the July 30-31 FOMC
minutes noted:
“…almost all participants confirmed that they were broadly comfortable with the characterization of
the contingent outlook for asset purchases that was presented in the June postmeeting press
conference and in the July monetary policy testimony.”
(Note that “participants” are all 19 officials on the FOMC. “Members” would be only the 12 voting members
on the Committee this year.)
This contingent outlook was the following: “…if economic conditions improved broadly as expected, the
Committee would moderate the pace of its securities purchases later this year. And if economic conditions
continued to develop broadly as anticipated, the Committee would reduce the pace of purchases in
measured steps and conclude the purchase program around the middle of 2014. At that point, if the
economy evolved along the lines anticipated, the recovery would have gained further momentum,
unemployment would be in the vicinity of 7 percent, and inflation would be moving toward the Committee's
2 percent objective.”
There were a “few” participants who, while comfortable with the plan in general, “stressed the need to avoid
putting too much emphasis on the 7 percent value for the unemployment rate, which they saw only as
illustrative of conditions that could obtain at the time when the asset purchases are completed.”
Since July 31, to the extent they have revealed their preferences and expectations, Fed speakers have
generally left the door open for a taper announcement at the September 17-18 FOMC meeting (which is
still our forecast). St. Louis Fed President Bullard, a voter this year, appears to be an exception; he doesn’t
seem confident that the economy is “improving in the way we need.”
If they were so “comfortable,” why not put it in writing?
Recall that the July 31 policy statement said nothing about this contingent tapering plan. The debate about
this was among most, many, and a few of the 19 participants:
“Most participants saw the provision of such information, which would reaffirm the contingent outlook
presented following the June meeting, as potentially useful; however, many also saw possible difficulties,
such as the challenge of conveying the desired information succinctly and with adequate nuance…A few
participants saw other forms of communication as better suited for this purpose.”
But in the end, what really mattered is what the 12 voting “members” of the Committee thought:
“The Committee also considered whether to add more information concerning the contingent outlook for
asset purchases to the policy statement, but judged that doing so might prompt an unwarranted shift in
market expectations regarding asset purchases.“
Forward guidance discussion further highlights the challenges of transparency
“In general, there was support for maintaining the current numerical thresholds in the forward guidance. A
few participants expressed concern that a decision to lower the unemployment threshold could
potentially… [call] into question the credibility of the thresholds and undermining their effectiveness.
“Nonetheless, several participants were willing to contemplate lowering the unemployment threshold if
additional accommodation were to become necessary or if the Committee wanted to adjust the mix of
policy tools used to provide the appropriate level of accommodation.”
“One participant suggested that the Committee could announce an additional, lower set of thresholds for
inflation and unemployment; another indicated that the Committee could provide guidance stating that it
would not raise its target for the federal funds rate if the inflation rate was expected to run below a given
level at a specific horizon. The latter enhancement to the forward guidance might be seen as reinforcing
the message that the Committee was willing to defend its longer-term inflation goal from below as well as
from above.”
These issues likely will come up again at the September meeting, especially if the Committee tapers QE3
at that time.
Higher hopes for second half growth
“Participants generally continued to anticipate that the growth of real GDP would pick up somewhat in the
second half of 2013 and strengthen further thereafter.” Factors cited as likely to support a pickup in
economic activity included
1) highly accommodative monetary policy,
2) improving credit availability,
3) receding effects of fiscal restraint,
4) continued strength in housing and auto sales, and
5) improvements in household and business balance sheets.
“A number of participants indicated, however, that they were somewhat less confident about a near-term
pickup in economic growth than they had been in June.” Factors cited in this regard included
1) recent increases in mortgage rates,
2) higher oil prices,
3) slow growth in key U.S. export markets, and
4) the possibility that fiscal restraint might not lessen.
Fiscal considerations
“Moreover, uncertainty about the effects of the federal spending sequestration and related furloughs
clouded the outlook. It was noted, however, that fiscal restriction by state and local governments seemed to
be easing.”
Lack of conviction about labor market gains
“The June employment report showed continued solid gains in payrolls. Nonetheless, the unemployment
rate remained elevated, and the continuing low readings on the participation rate and the employment-topopulation ratio, together with a high incidence of workers being employed part time for economic
reasons…”
Mixed views on inflation
“A few participants, who felt that the recent low inflation rates were unlikely to persist or that the low PCE
inflation readings might be marked up in future data revisions, suggested that, as transitory factors receded
and the pace of recovery improved, inflation could be expected to return to 2 percent reasonably quickly.
“A number of others, however, viewed the low inflation readings as largely reflecting persistently deficient
aggregate demand, implying that inflation could remain below 2 percent for a protracted period and further
supporting the case for highly accommodative monetary policy.”
(A “few” is probably less than a “number.” This concern about persistently deficient demand doesn’t rule
out a tapering, but does underline the Committee’s commitment to continued easy policy for the forseeable
future.)
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