–Low Funds Rate Appropriate for “Several More Years”
WASHINGTON (MNI) – The latest FOMC minutes said most Committee
participants judged that exceptionally low rates “would remain
appropriate for several more years.” The following are two excerpts from
the Federal Open Market Committee minutes of the Sept. 12-13 policy
meeting published Thursday, beginning with the discussion of what is
appropriate policy in the context updated quarterly projections
formulated at the meeting that suggested more accommodation than seen
necessary in the previous set of projections.
The second excerpt is the summary of considerations that shaped the
latest instructions to the New York Federal Reserve Bank’s Market Desk
for execution of the new policy, including QE3:
Appropriate Monetary Policy
As indicated in figure 2, most participants judged that
exceptionally low levels of the federal funds rate would remain
appropriate for several more years. In particular, 12 participants
thought that the first increase in the target federal funds rate would
not be warranted until 2015, and 1 viewed a start to firming in 2016 as
appropriate (upper panel). The 12 participants who expected that the
target federal funds rate would not move above its effective lower bound
until 2015 thought the federal funds rate would be 1.6 percent or lower
at the end of that year, while the one participant who expected that
policy firming would commence in 2016 saw the funds rate target at 75
basis points at the end of that year. Six participants judged that
policy firming in 2012, 2013, or 2014 would be consistent with the
Committee’s statutory mandate. Those participants judged that the
appropriate value for the federal funds rate would range from 1 to 3
percent at the end of 2014 and from 2 to 4 percent at the end of 2015.
In total, 14 participants judged that appropriate monetary policy called
for a more-accommodative path for the federal funds rate than in their
June submissions, involving either a lower target for the federal funds
rate at the end of the initial year of policy firming, or a shift out in
the first year of firming.
All participants reported levels for the appropriate target federal
funds rate at the end of 2014 that were well below their estimates of
the level expected to prevail in the longer run, and most saw the
appropriate target federal funds rate as still well below its longer-run
value at the end of 2015. Estimates of the longer-run target federal
funds rate ranged from 3 to 4 percent, reflecting the Committee’s
inflation objective of 2 percent and participants’ judgments about the
longer-run equilibrium level of the real federal funds rate.
Participants also provided qualitative information on their views
regarding the appropriate path of the Federal Reserve’s balance sheet.
Eleven participants indicated that appropriate policy would involve a
decision by the Committee, at the September meeting or soon thereafter,
to undertake significant additional asset purchases. Several
participants envisioned this program as entailing purchases of agency
mortgage-backed securities. Almost all participants assumed that, at the
appropriate time, the Committee would carry out the normalization of the
balance sheet according to the principles approved at the June 2011 FOMC
meeting. In general, participants linked their preferred start dates for
the normalization process to their views for the appropriate timing of
the first increase in the target federal funds rate.
The key factors informing participants’ individual assessments of
the appropriate setting for monetary policy included their judgments
regarding labor market conditions that would be consistent with the
maximum level of employment, the extent to which employment currently
deviated from the maximum level of employment, the extent to which
inflation deviated from the Committee’s longer-term objective of 2
percent, and participants’ projections of the likely time horizon
necessary to return employment and inflation to mandate-consistent
levels. Several participants noted that their assessments of appropriate
monetary policy reflected the subpar pace of labor market improvement
and the persistent shortfall of output from potential since the 2007-09
recession. A few participants noted that their settings of appropriate
federal funds rate policy took into account unusual factors prevailing
in recent years, such as the likelihood that the neutral level of the
federal funds rate was somewhat below its his- torical norm and the fact
that policy rate setting had been constrained by the effective lower
bound on nominal interest rates. Two participants expressed concern that
a protracted period of very accommodative monetary policy could lead to
imbalances in the financial system. Participants also noted that because
the appropriate stance of monetary policy is conditional on the
evolution of real activity and inflation over time, their assessments of
the appropriate future path of the federal funds rate and the balance
sheet could change if economic conditions were to evolve in an
unexpected manner.
Figure 3.E details the distribution of participants’ judgments
regarding the appropriate level of the target federal funds rate at the
end of each calendar year from 2012 to 2015 and over the longer run. As
previously noted, most participants judged that economic conditions
would warrant maintaining the current low level of the federal funds
rate through the end of 2014. Views on the appropriate level of the
federal funds rate at the end of 2015 were more widely dispersed, with
10 participants seeing the appropriate level of the federal funds rate
as 1 percent or lower and 6 of them seeing the appropriate rate as 2
percent or higher. Those who judged that a longer period of very
accommodative monetary policy would be appropriate generally were
participants who projected a sizable gap between the unemployment rate
and the longer-run normal level of the unemployment rate until 2015 or
later. In contrast, the 6 participants who judged that policy firming
should begin in 2012, 2013, or 2014 indicated that the Committee would
need to act relatively soon in order to keep inflation near the FOMC’s
longer-run objective of 2 percent and to prevent a rise in inflation
expectations.
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** MNI Washington Bureau: 202-371-2121 **
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