By Steven K. Beckner
Continued:
Going forward, “many participants indicated a preference for
replacing the calendar date with language describing the economic
factors that the Committee would consider in deciding to raise its
target for the federal funds rate.”
Among the purported benefits of a non-calendar approach were “the
potential for enhanced effectiveness of policy through greater clarity
regarding the Committee’s future behavior. That approach could also
bolster the stimulus provided by the System’s holdings of longer-term
securities.”
“It was noted that forward guidance along these lines would allow
market expectations regarding the federal funds rate to adjust
automatically in response to incoming data on the economy,” the minutes
say.
Chicago Fed President Charles Evans has been proposing for more
than a year that the Fed declare that it will keep the funds rate near
zero so long as the unemployment rate remains above 7% and inflation
stays below 3%. More recently, Minneapolis Fed President Naryana has
proposed a less ambitious set of thresholds.
The minutes suggest that sentiment is increasingly coalescing
around that general approach, but that divisions remain too large to
agree on an exact formula for the foreseeable future.
“Many participants thought that more-effective forward guidance
could be provided by specifying numerical thresholds for labor market
and inflation indicators that would be consistent with maintaining the
federal funds rate at exceptionally low levels,” the minutes say.
“However, reaching agreement on specific thresholds could be
challenging given the diversity of participants’ views, and some were
reluctant to specify explicit numerical thresholds out of concern that
such thresholds would necessarily be too simple to fully capture the
complexities of the economy and the policy process or could be
incorrectly interpreted as triggers prompting an automatic policy
response,” they continue.
“In addition, numerical thresholds could be confused with the
Committee’s longer-term objectives, and so undermine the Committee’s
credibility,” the minutes go on. “At the conclusion of the discussion,
most participants agreed that the use of numerical thresholds could be
useful to provide more clarity about the conditionality of the forward
guidance but thought that further work would be needed to address the
related communications challenges.”
The minutes show that, as Bernanke said after the meeting, and as
the FOMC statement said, members were convinced that the economy was
growing too slowly to reduce unemployment significantly and that
therefore more Fed action was needed.
Although “economic activity had continued to expand at a moderate
pace in recent months,” the minutes say “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,” they continue.
The FOMC was also wary of downside risks from both Europe and from
domestic fiscal policy snarls.
“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 minutes
say, and “the possibility of a larger-thanexpected fiscal tightening in
the United States and slower global growth were also seen as downside
risks.”
Meanwhile, the FOMC majority saw no real inflation threat,
anticipating that “inflation over the medium term would run at or below
the Committee’s longerrun objective of 2%.”
(2 of 2)
** MNI **
[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$$BR$]
