WASHINGTON (MNI) – The following are excerpts from the text of the
minutes of the Federal Open Market Committee’s November 1-2 meeting
published Tuesday:
Monetary Policy Strategies and Communication
The staff gave a presentation on alternative monetary policy
strategies, and meeting participants discussed those alternatives as
well as potential approaches for enhancing the clarity of their public
communications. No decision was made at this meeting to change the
Committee’s policy strategy or communications. It was noted that many
central banks around the world pursue an explicit inflation objective,
maintain flexibility to stabilize economic activity, and seek to
communicate their forecasts and policy plans as clearly as possible.
Many participants pointed to the merits of specifying an explicit
longer-run inflation goal, but it was noted that such a step could be
misperceived as placing greater weight on price stability than on
maximum employment; consequently, some suggested that a numerical
inflation goal would need to be set forth within a context that clearly
underscored the Committee’s commitment to fostering both parts of its
dual mandate. More broadly, a majority of participants agreed that it
could be beneficial to formulate and publish a statement that would
elucidate the Committee’s policy approach, and participants generally
expressed interest in providing additional information to the public
about the likely future path of the target federal funds rate. The
Chairman asked the subcommittee on communications to give consideration
to a possible statement of the Committee’s longer-run goals and policy
strategy, and he also encouraged the subcommittee to explore potential
approaches for incorporating information about participants’ assessments
of appropriate monetary policy into the Summary of Economic Projections.
Committee participants shared their views regarding the potential
merits and pitfalls of making conditional commitments regarding the
future course of monetary policy. As noted in the staff briefing,
economic theory and model simulations suggested that a policy strategy
involving such commitments could foster better macroeconomic outcomes
than a discretionary approach of reoptimizing policy at every meeting,
so long as the public understood the central bank’s strategy and
believed that policymakers would follow through on those commitments.
Some participants noted that conditional commitments might be
particularly helpful in providing additional accommodation and
mitigating downside risks when the policy rate is close to its effective
lower bound, because a central bank can commit to a shallower interest
rate trajectory than investors would expect if policymakers followed a
purely discretionary approach. However, many pointed out that the
implementation of such a strategy could pose substantial communication
challenges and that the benefits would be diminished if the strategy was
not fully credible. Indeed, one participant suggested that additional
purchases of longer-term securities would be a clearer and more
effective way to provide additional monetary accommodation when the
federal funds rate was near its lower bound.
Given the potential pitfalls of pursuing commitment strategies
extending far out into the future, many participants thought that the
Committee should consider policies intended to accrue some of the gains
from conditional commitments and to perform well in a wide range of
alternative scenarios. In this vein, a number of participants expressed
support for the possibility of clarifying the conditionality of the
Committee’s forward guidance about the trajectory of the federal funds
rate through setting numerical thresholds for unemployment and inflation
that would warrant exceptionally low levels for the policy rate.
However, several participants noted that such thresholds could be
confusing in the absence of a clear expression of the Committee’s
longer-term goals. Moreover, others suggested that such an approach
could be problematic in light of significant uncertainties about the
longer-run normal rate of unemployment. One participant pointed to those
uncertainties as instead supporting the use of thresholds as a way of
managing potential inflation risks associated with additional
accommodation.
The Committee also considered policy strategies that would involve
the use of an intermediate target such as nominal gross domestic product
(GDP) or the price level. The staff presented model simulations that
suggested that nominal GDP targeting could, in principle, be helpful in
promoting a stronger economic recovery in a context of longer-run price
stability. Other simulations suggested that the single-minded pursuit of
a price-level target would not be very effective in fostering maximum
sustainable employment; it was noted, however, that price-level
targeting where the central bank maintained flexibility to stabilize
economic activity over the short term could generate economic outcomes
that would be more consistent with the dual mandate.
More broadly, a number of participants expressed concern that
switching to a new policy framework could heighten uncertainty about
future monetary policy, risk unmooring longer-term inflation
expectations, or fail to address risks to financial stability. Several
participants observed that the efficacy of nominal GDP targeting
depended crucially on some strong assumptions, including the premise
that the Committee could make a credible commitment to maintaining such
a strategy over a long time horizon and that policymakers would continue
adhering to that strategy even in the face of a significant increase in
inflation.
In addition, some participants noted that such an approach would
involve substantial operational hurdles, including the difficulty of
specifying an appropriate target level. In light of the significant
challenges associated with the adoption of such frameworks, participants
agreed that it would not be advisable to make such a change under
present circumstances.
** Market News International Washington Bureau: 202-371-2121 **
[TOPICS: MMUFE$,MGU$$$,M$U$$$,MFU$$$]
