Asset purchase reductions are now appropriate, or would soon be, as a result of sustained job market improvements, some Federal Open Market Committee members believe, while others feel a decrease would limit flexibility, according to the minutes of the FOMC's June meeting, released Wednesday.
"Many members" wanted to see further improvement in the outlook for the labor market "before it would be appropriate to slow the pace of asset purchases," the minutes said. "Some" also wanted "more evidence that the projected acceleration in economic activity would occur, before reducing the pace of asset purchases."
"Since the September meeting, some participants had become more confident of sustained improvement in the outlook for the labor market and so thought that a downward adjustment in asset purchases had or would likely soon become appropriate; they saw a need to clearly communicate an intention to lower the pace of purchases before long," the minutes note. "However, to some other participants, this approach appeared likely to limit the Committee's flexibility in adjusting asset purchases in response to changes in economic conditions, which they viewed as a key element in the design of the purchase program."
There was concern that announcing the intention to reduce asset purchases, even if conditioned on economic developments matching Fed expectations, "might be misinterpreted as signaling an end to the addition of policy accommodation or even be seen as the initial step toward exit from the Committee's highly accommodative policy stance. It was suggested that any statement about asset purchases make clear that decisions concerning the pace of purchases are distinct from decisions concerning the federal funds rate."
While members generally believed more clarity about the purchase program needed to be disseminated soon, some wanted it in the post-meeting statement, while others believed it would be too difficult to "convey succinctly the desired information in the post-meeting statement."
Still, other members "noted the need to ensure that any new statement language intended to provide more information about the asset purchase program be clearly integrated with communication about the Committee's other policy tools."
The FOMC decided that Fed Chairman Ben Bernanke should use his post-meeting press conference to "describe a likely path for asset purchases in coming quarters that was conditional on economic outcomes broadly in line with the Committee's expectations. In addition, he would make clear that decisions about asset purchases and other policy tools would continue to be dependent on the Committee's ongoing assessment of the economic outlook. He would also draw the distinction between the asset purchase program and the forward guidance regarding the target for the federal funds rate, noting that the Committee anticipates that there will be a considerable time between the end of asset purchases and the time when it becomes appropriate to increase the target for the federal funds rate."
FOMC members generally agree to the exit strategy principles from two years ago, and while most members felt the discussion was "prudent longer-range planning," others felt the talks were "premature," according to the minutes.
Still, members believe "many of the details of the eventual normalization process would likely differ from those specified two years ago, that the appropriate details would depend in part on economic and financial developments."
The FOMC will have to "provide additional information about its intentions" as the exit nears, the committee determined. While panelists believe the Fed, in the long run, should hold "predominantly Treasury securities," a majority of members "now anticipated that the Committee would not sell agency mortgage-backed securities (MBS) as part of the normalization process, although some indicated that limited sales might be warranted in the longer run to reduce or eliminate residual holdings."
Some participants said they prefer to wait until the exit begins to make a decision about MBS sales.
The Fed sees economic activity still growing moderately, as private-sector employment "expanded further in recent months," and the unemployment rate, while elevated, was lower than its first-quarter average.
Consumer price inflation stayed subdued, and longer-run inflation expectations were steady. Housing sector conditions "generally improved" despite weakness in construction activity, and tight credit conditions held back mortgage demand.
"Financial markets were volatile during the intermeeting period as investors reacted to incoming economic data and Federal Reserve communications. Information about the U.S. economy was somewhat better, on balance, than investors had anticipated, apparently giving them greater confidence in the economic outlook," according to the minutes.
Market participants generally interpreted Fed communications "as pointing to a less accommodative stance of future monetary policy than they previously had expected. Market-based indicators suggested that investors revised up their expectations about the path of the federal funds rate in coming years. Forward rates two to three years ahead derived from overnight index swaps shifted up 25 to 40 basis points over the intermeeting period, likely reflecting both an increase in the expected path for the federal funds rate and an increase in term premiums."
Primary dealers, however, "showed little material change, on balance, in the dealers' expectations of the most likely timing of the first increase in the federal funds rate target."
Staff economic projections for near-term growth of real gross domestic product were "little changed" from those prepared for the previous meeting, the Fed said, but medium-term projections were raised. Inflation forecasts were "revised down a little" for the near-term, but were not "materially" different for the medium-term.