–Low Funds Rate Appropriate for “Several More Years”
Committee Policy Action
Committee members saw the information received over the
intermeeting period as suggesting that economic activity had continued
to expand at a moderate pace in recent months. However, growth in
employment had been slow, and almost all members saw the unemployment
rate as still elevated relative to levels that they viewed as consistent
with the Committee’s mandate. Members generally judged that without
additional policy accommodation, economic growth might not be strong
enough to generate sustained improvement in labor market conditions.
Moreover, while the sovereign and banking crisis in Europe had eased
some recently, members still saw strains in global financial conditions
as posing significant downside risks to the economic outlook. The
possibility of a larger-thanexpected fiscal tightening in the United
States and slower global growth were also seen as downside risks.
Inflation had been subdued, even though the prices of some key
commodities had increased recently. Members generally continued to
anticipate that, with longerterm inflation expectations stable and given
the existing slack in resource utilization, inflation over the medium
term would run at or below the Committee’s longerrun objective of 2
percent.
In their discussion of monetary policy for the period ahead,
members generally expressed concerns about the slow pace of improvement
in labor market conditions and all members but one agreed that the
outlook for economic activity and inflation called for additional
monetary accommodation. Members agreed that such accommodation should be
provided through both a strengthening of the forward guidance regarding
the federal funds rate and purchases of additional agency MBS at a pace
of $40 billion per month. Along with the ongoing purchases of $45
billion per month of longer-term Treasury securities under the maturity
extension program announced in June, these purchases will increase the
Committee’s holdings of longer-term securities by about $85 billion each
month through the end of the year, and should put downward pressure on
longer-term interest rates, support mortgage markets, and help make
broader financial conditions more accommodative. Members also agreed to
maintain the Committee’s existing policy of reinvesting principal
payments from its holdings of agency debt and agency MBS into agency
MBS. The Committee agreed that it would closely monitor incoming
information on economic and financial developments in coming months, and
that if the outlook for the labor market did not improve substantially,
it would continue its purchases of agency MBS, undertake additional
asset purchases, and employ its other policy tools as appropriate until
such improvement is achieved in a context of price stability. This
flexible approach was seen as allowing the Committee to tailor its
policy response over time to incoming information while incorporating
conditional features that clarified the Committee’s intention to improve
labor market conditions, thereby enhancing the effectiveness of the
action by helping to bolster business and consumer confidence. While
members generally viewed the potential risks associated with these
purchases as manageable, the Committee agreed that in determining the
size, pace, and composition of its asset purchases, it would, as always,
take appropriate account of the likely efficacy and costs of such
purchases. With regard to the forward guidance, the Committee agreed on
an extension through mid-2015, in conjunction with language in the
statement indicating that it expects that a highly accommodative stance
of policy will remain appropriate for a considerable time after the
economic recovery strengthens. That new language was meant to clarify
that the maintenance of a very low federal funds rate over that period
did not reflect an expectation that the economy would remain weak, but
rather reflected the Committee’s intention to support a stronger
economic recovery. One member dissented from the policy decision, on the
grounds that he opposed additional asset purchases and preferred to omit
the calendar date from the forward guidance; in his view, it would be
better to use qualitative language to describe the factors that would
influence the Committee’s decision to increase the target federal funds
rate.
–end of FOMC Minutes text excerpts–
** MNI Washington Bureau: 202-371-2121 **
[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$]
