WASHINGTON (11/15/12)--The Federal Reserve's monetary policymakers in October discussed using specific threshold values of inflation and the unemployment rate as forward guidance about the federal funds rate and indicated that additional asset purchases likely would be appropriate next year after Operation Twist expires.
But while there was general agreement on the overall policy, the devil is in the details. According to minutes of the Federal Open Market Committee's (FOMC) Oct. 23-24 meeting, released Wednesday afternoon, committee members were divided on the specifics.
Committee members discussed whether such thresholds might replace or augment the date-based guidance that the Fed has provided in its policy statements since August 2011. (For example, the latest guidance from the October meeting indicated that the fed funds rate likely would stay steady at 0% to 0.25% through mid-2015. In September the date indicated was late 2014).
"Participants generally favored the use of economic variables, in place of or in conjunction with a calendar date…but they offered different views on whether quantitative or qualitative thresholds would be most effective," said the minutes.
Several participants "were concerned that quantitative thresholds could confuse the public by giving the impression that the FOMC focuses on a small number of economic variables in setting monetary policy, when the committee in fact uses a wide range of information," the minutes said.
"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." Issues included whether the committee should:
- Specify the thresholds in terms of realized or projected values of inflation and unemployment rate and values they would hold;
- Supplement inflation and unemployment rate thresholds with additional indicators that might signal a need to raise the funds rate or delay it; and
- Provide forward guidance in its statement about the likely path of the federal funds rate after the initial increase.
The FOMC also discussed the effects of policy actions taken in September to strengthen its forward guidance and to purchase additional mortgage backed securities (MBS).
The initial effects were generally viewed as consistent with a marked easing in financial conditions. Some indicated the central bank should continue to buy bonds next year, others suggested expanding the assets might impact financial markets or make it more difficult for the Fed to tighten policy when the economy needs it. Some suggested more time would be required to assess the effects.
"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 Fed's Operation Twist, which expires Dec. 31, involves swapping about $45 billion of short-term Treasuries on its balance sheet for longer-term debt. It also is purchasing $40 billion a month in MBS in a third round of so-called quantitative easing (dubbed QE3), which aims to fuel growth in the economy and reduce unemployment.
The minutes suggest the FOMC may begin outright purchases of around $45 billion a month of Treasuries to maintain the current pace, Millan Mulraine, senior U.S. strategist for TD Securities in New York, told Bloomberg.com
Such a move along with QE3 would constitute "a full- fledged quantitative easing of MBS and Treasuries of about $85 billion a month," Mulraine said. That level of buying may continue for at least six months, he said.