-Participants Generally Favored Thresholds Over Date In FOMC Statement
-Several Participants Questioned Effectiveness Of Current Asset Buys

By Brai Odion-Esene

WASHINGTON (MNI) – A number of participants at the October meeting of the
Federal Open Market Committee believed additional asset buys by the central bank
will be needed next year to ensure a significant improvement in the jobs market,
but several questioned the impact and future of current purchases of long term
securities, according to the minutes of the Oct. 23-24 meeting Wednesday.

The minutes also show senior Fed officials attending the meeting in
Washington voiced a preference for economic variables in the FOMC’s forward
guidance on how long they expect to keep short term interest rates close to
zero, as opposed to a calendar date, using either quantitative or qualitative
threshold values for inflation and unemployment.

However, no decision was reached as Committee participants favored one
approach or the other, and identified further steps necessary before any

After its meeting back in September, the Fed’s steering group announced a
program to purchase $40 billion a month in mortgage-backed securities as long as
there is no labor market improvement. Layered on top of the ongoing “maturity
extension program” or ‘Operation Twist’, this meant a total of $85 billion per
month in combined longer term securities purchases. It also extended its forward
guidance calendar date to mid-2015.

Assessing the impact of the MBS buys, the minutes said the initial effects
were generally viewed as consistent with “a marked easing” in financial
conditions. Some, however, suggested that more time would be needed to gauge the
program’s impact on mortgage rates and broader financial conditions.

With regard to the inflation risks, the effect was said to be relatively
muted or likely the result of reduced risks of undesirably low inflation.

“Looking ahead, a number of participants indicated that additional asset
purchases would likely be appropriate next year after the conclusion of the
maturity extension program in order to achieve a substantial improvement in the
labor market,” the minutes said.

“In that regard, a couple of participants noted the likely usefulness of
clarifying the range of indicators that would be evaluated in assessing the
outlook for the labor market,” it added.

It is important to note that the composition of the FOMC will be slightly
different next year, and the minutes said several participants questioned the
effectiveness of the current purchases “or whether a continuation of them would
be warranted if the recent moderate pace of economic recovery were sustained.”

Several were also worried that the massive amount of asset buys by the
central bank might complicate its eventual withdrawal of monetary stimulus when
the time comes, or negatively impact the functioning of the asset markets.

Overall, “Participants generally agreed that in determining the appropriate
size, pace, and composition of further purchases, they would need to carefully
assess the efficacy of asset purchases in fostering stronger economic activity
and consider the potential risks and costs of such purchases,” the minutes said.

On the matter of thresholds and the forward guidance, the minutes said
participants generally favored the use of economic variables in place or in
conjunction with a calendar date, but had differed over whether a quantitative
or qualitative approach would be more effective.

“Many participants were of the view that adopting quantitative thresholds
could, under the right conditions, help the Committee more clearly communicate
its thinking about how the likely timing of an eventual increase in the federal
funds rate would shift in response to unanticipated changes in economic
conditions and the outlook,” the minutes said.

The minutes added that those in favor of the above path felt thresholds
“could increase the probability that market reactions to economic developments
would move longer-term interest rates in a manner consistent with the
Committee’s view regarding the likely future path of short-term rates.”

In the opposite camp, “a number of other participants judged that
communicating a careful qualitative description of the indicators influencing
the Committee’s thinking about current and future monetary policy, or providing
more information about the Committee’s policy reaction function, would be more
informative than either quantitative thresholds or date-based forward guidance,”
the minutes said.

However, there was a concern among several Fed officials that quantitative
thresholds would lead the public to believe the FOMC focuses on a small set of
economic variables when setting monetary policy.

The minutes added that some worried the public might mistakenly interpret
quantitative thresholds as equivalent to the Committee’s longer-run objectives
or as triggers that, when reached, would prompt an immediate rate increase.

“Participants generally agreed that the Committee would need to resolve a
number of practical issues before deciding whether to adopt quantitative
thresholds to communicate its thinking about the timing of the initial increase
in the federal funds rate,” the minutes said.

As to the state of the economy, the expectation for a moderate pace of
growth over coming quarters was maintained, with the minutes noting that most
participants expected the Fed’s highly accommodative policy to support the
recovery going forward.

Not surprisingly, many viewed the uncertainty swirling around the U.S.
fiscal situation and the eurozone’s struggles as likely to restrain the pace of
growth in the coming months.

“Moreover, many participants cited significant downside risks to the
outlook that might arise from more widespread weakness in global economic
activity or an intensification of strains in global financial markets,” the
minutes said.

In the housing market, several participants spoke of obstacles to a more
rapid improvement; such as long backlogs for processing home-purchase mortgages,
tight capacity at lenders, and underwriting standards that remain strict.

Still, “Participants generally agreed that a recovery in housing activity
now appeared to be under way,” the minutes said.

** MNI Washington Bureau: 202-371-2121 **

–email: besene@mni-news.com