While Federal Open Market Committee members "generally supported" the panel's current guidance, discussion ensued about whether accommodation could be removed sooner, or perhaps later, minutes of the June FOMC meeting showed.
"Some participants suggested that the Committee's communications about its forward guidance should emphasize more strongly that its policy decisions would depend on its ongoing assessment across a range of indicators of economic activity, labor market conditions, inflation and inflation expectations, and financial market developments," the minutes note.
Both "a slower or a more rapid removal of policy accommodation" came under discussion. "For example, a number of participants noted their concern that a more gradual approach might be appropriate if forecasts of above-trend economic growth later this year were not realized. And a couple suggested that the Committee might need to strengthen its commitment to maintain sufficient policy accommodation to return inflation to its target over the medium term in order to prevent an undesirable decline in inflation expectations. Alternatively, some other participants expressed concern that economic growth over the medium run might be faster than currently expected or that the rate of growth of potential output might be lower than currently expected, calling for a more rapid move to begin raising the federal funds rate in order to avoid significantly overshooting the Committee's unemployment and inflation objectives."
While noting the taper is not preset, members generally agreed that if the economy moves as expected, asset purchases would end this year. The panel felt the question of whether the program would end with a final $15 billion cut or $10 billion and $5 billion reductions is "a technical issue with no substantive macroeconomic consequences and no consequences for the eventual decision about the timing of the first increase in the federal funds rate-a decision that will depend on the Committee's evolving assessments of actual and expected progress toward its objectives."
However, the consensus seemed to be for a $15 billion final cut in October "in order to avoid having the small, remaining level of purchases receive undue focus among investors."
While the committee continued to talk about "the eventual normalization of the stance and conduct of monetary policy," it was meant to be "prudent planning and did not imply that normalization would necessarily begin sometime soon," the minutes noted.
Participants said "adjustments in the rate of interest on excess reserves (IOER) should play a central role during the normalization process."
The FOMC members agreed "the federal funds rate should continue to play a role in the Committee's operating framework and communications during normalization, with many of them indicating a preference for continuing to announce a target range."
While "a few participants" suggested a preference for focusing "on an administered rate in communicating the stance of policy during the normalization period. In addition, participants examined possibilities for changing the calculation of the effective federal funds rate in order to obtain a more robust measure of overnight bank funding rates and to apply lessons from international efforts to develop improved standards for benchmark interest rates."
As for reinvestment, consensus seemed to be for ending them "at or after the time of liftoff would be best, with most of these participants preferring to end them after liftoff" since "an earlier change to the reinvestment policy would involve risks to the economic outlook if it was seen as suggesting that the Committee was likely to tighten policy more rapidly than currently anticipated or if it had unexpectedly large effects in MBS markets; moreover, an early change could add complexity to the Committee's communications at a time when it would be clearer to signal changes in policy through interest rates alone."
Dissenters suggested that "ending reinvestments prior to the first firming in policy interest rates, as stated in the Committee's exit strategy principles announced in June 2011," would help the FOMC's credibility.
Turning to the economy, the panel believes financial conditions remain "supportive of growth in economic activity and employment: The expected path of the federal funds rate was slightly lower in the long run, yields on longer-term Treasury securities moved down modestly, equity prices rose, corporate bond spreads narrowed, and the foreign exchange value of the dollar was little changed."
Also, dealers' consensus expectation for liftoff were unchanged from the previous meeting, "but showed a lower median longer-run level of the federal funds rate relative to the April survey."
Economic projections "were somewhat different from the forecasts presented at the March meeting," with the jobless rate, real GDP growth, and inflation "all a little lower, on balance, than those in its March forecast."
Accommodative policy was seen as backing expansion, while inflation was expected to be below the 2% target rate. "Most participants viewed the risks to the outlook for the economy, the labor market, and inflation as broadly balanced."
