The Federal Reserve released the minutes to the October 29-30 Federal Open Market Committee (FOMC) meeting, providing an inside look at the internal deliberations. As noted earlier, the FOMC made no changes to its monetary policy actions at the October meeting, continuing to purchase $85 billion in long-term and mortgage-backed securities each month. It also affirmed its goal of maintaining “highly accommodative” policies until the unemployment rate hits 6.5 percent and/or long-term inflation exceeds 2.5 percent. As such, this means that short-term interest rates will remain near zero percent throughout 2014, and perhaps into 2015.
Over the summer, the Fed had been expected to begin “tapering” (or reducing) its asset purchases by year’s end, with it widely anticipated to start at the September 17-18 meeting. Instead, the FOMC chose not to taper at that meeting, surprising the market. In making its decision, the Fed cited the political stalemate in Washington and the possibility of a government shutdown. Beyond that, it also wrote:
In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.
The Fed has since insisted that a tapering decision was not pre-ordained, with any action being data dependent. Nonetheless, the Fed was widely criticized for miscommunicating its intentions, something that Chairman Ben Bernanke addressed at last night’s National Economists Club annual meeting. The threat of reducing asset purchases had sent long-term interest rates sharply higher, which he said was “neither welcome nor warranted.” Moreover, he added, “This change in expectations did not correspond to any actual lessening in the FOMC’s commitment or intention to provide the high degree of monetary accommodation needed to meet its objectives….”
The Fed’s forward guidance was discussed in both the FOMC minutes and Bernanke’s speech. Specifically, Bernanke noted that that 6.5 percent unemployment rate target was a “threshold” and not a “trigger.” In other words, the FOMC would begin debating a wind-down to its accommodative policies once the unemployment reached 6.5 percent, but one should not assume that the fed funds rate will automatically go up just because the threshold was reached. The Fed minutes make a similar point, with a couple participants pushing for an even lower target unemployment rate.
In the end, the FOMC voted to keep its policies in place without changing its forward guidance. The issue of accommodation remains a controversial one in the public and within the FOMC, with inflation hawks worried about longer-term inflation worries from current actions. Esther L. George, the president of the Kansas City Fed, dissented from the Fed’s statement for that reason. The minutes did reiterate that tapering was to begin “in the coming months,” but that is not likely to occur until probably early next year. The next FOMC meeting is on December 15-16.
Regarding the economy, the FOMC members found that the impacts of the partial government shutdown were “temporary and limited,” with several of them worrying about “the possible economic effects of repeated fiscal impasses on business and consumer confidence.” They were also disappointed with the September jobs numbers. Yet, they were encouraged by the recent pickup in manufacturing activity, singling out strength in auto sales. While the economic projections for the short-term were slightly lower, the outlook for 2014 and 2015 currently calls for growth to accelerate. In September, the Fed had estimated growth of 2.9 to 3.1 percent real GDP growth for next year.
Chad Moutray is the chief economist, National Association of Manufacturers. He is a former president and chairman of the National Economists Club, where Bernanke gave the Herbert Stein Memorial Lecture.