Fed To Taper Again; Still Developing Plan For Normalizing Policy

Members of the Federal Open Market Committee (FOMC) voted April 29-30 to continue tapering the Federal Reserve's bond buying program – thus curtailing the Fed's monthly purchase of mortgage-backed securities from $25 billion to $20 billion and reducing its monthly acquisition of Treasury securities from $30 billion to $25 billion. The tapering took place earlier this month.

For the most part, the FOMC's economic outlook did not change materially from its March meeting.

With regard to increasing short-term interest rates, minutes from the meeting reveal that policymakers are looking for stronger economic growth in the second half of the year before making any decision.

Although ‘recent indicators pointed to a rebound and suggested that the economy had returned to a trajectory of moderate growth,’ most committee members felt it was ‘too early to confirm that the bounce back in economic activity would put the economy on a path of sustained above-trend economic growth,’ according to the meeting minutes, which were released to the public on May 21.

‘In general, participants continued to view the risks to the outlook for the economy and the labor market as nearly balanced,’ the minutes state. ‘However, a number of participants pointed to possible sources of downside risk to growth, including a persistent slowdown in the housing sector or potential international developments, such as a further slowing of growth in China or an increase in geopolitical tensions regarding Russia and Ukraine.’

Unlike previous meetings, FOMC members spent a good deal of time discussing the ‘continuing weakness in housing activity.’

‘They saw a range of factors affecting the housing market, including higher home prices, construction bottlenecks stemming from a scarcity of labor and harsh winter weather, input cost pressures, or a shortage in the supply of available lots,’ the minutes state.

But the committee members spent most of the meeting discussing the Fed's plans for rolling back its low-interest-rate policies. They also took in a presentation that ‘outlined several approaches to raising short-term interest rates when it becomes appropriate to do so, and to controlling the level of short-term interest rates once they are above the effective lower bound, during a period when the Federal Reserve will have a very large balance sheet.’

Basically, the Fed is trying to determine which policy tools will be most effective to accomplish ‘normalization’ of its current policies.

‘The approaches differed in terms of the combination of policy tools that might be used to accomplish those objectives,’ the minutes state. ‘In addition to the rate of interest paid on excess reserve balances, the tools considered included fixed-rate overnight reverse repurchase operations, term reverse repurchase agreements, and the Term Deposit Facility.

The committee members analyzed ‘how various combinations of tools could have different implications for the degree of control over short-term interest rates, for the Federal Reserve's balance sheet and remittances to the Treasury, for the functioning of the federal funds market, and for financial stability in both normal times and in periods of stress,’ the minutes state.

‘Because the Federal Reserve has not previously tightened the stance of policy while holding a large balance sheet, most participants judged that the committee should consider a range of options and be prepared to adjust the mix of its policy tools as warranted,’ the minutes state. ‘Participants generally favored the further testing of various tools, including the [Term Deposit Facility], to better assess their operational readiness and effectiveness.’

To read the full minutes, click here.


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