Labor market and inflation moved closer to the Federal Open Market Committee targets in the past few months, and if the progress speeds up, it may mean removing policy accommodation earlier than expected, according to the minutes from the most recent FOMC meeting, which were released Wednesday.
"With respect to monetary policy over the medium run, participants generally agreed that labor market conditions and inflation had moved closer to the Committee's longer-run objectives in recent months, and most anticipated that progress toward those goals would continue," the minutes noted. "Moreover, many participants noted that if convergence toward the Committee's objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated."
In fact, "some" members voiced a "call for a relatively prompt move toward reducing policy accommodation" in the face of "actual and expected progress" toward the dual mandate. Those looking for removal of accommodation, according to the minutes "were increasingly uncomfortable with the Committee's forward guidance."
These members believe the guidance suggests the liftoff will be later than it will be and that federal funds rates will be are lower "than they judged likely to be appropriate."
Most participants, however, said any change in the timing of an increase would be data-dependent. While the first-quarter drop in GDP was seen as "transitory," in the minds of these members, it raised uncertainty about the outlook.
"Several" members, according to the minutes, "continued to believe that inflation was likely to move back to the Committee's objective very slowly, thereby warranting a continuation of highly accommodative policy as long as projected inflation remained below 2 percent and longer-term inflation expectations were well anchored."
After the June statement, the expected fed funds rate path "shifted down modestly." The July Survey of Primary Dealers, showed, however, expectations for the fed funds rate "were largely unchanged" from June, with the median expectation for liftoff being the third quarter of 2015, although, "the distribution of the modal expected time of liftoff became more concentrated around the third quarter of 2015."
While GDP was weaker than expected in the first half, the staff projections for the second half of 2014 were "essentially unrevised." Labor markets improved, according to participants. There was agreement that labor market improvement was better than expected and conditions were "noticeably closer to those viewed as normal in the longer run."
But labor market slack, and how to measure it, remained areas of contention. While "a few" were happy using the unemployment rate, "many participants continued to see a larger gap between current labor market conditions and those consistent with their assessments of normal levels of labor utilization than indicated by the difference between the unemployment rate and estimates of its longer-run normal level."
Others suggested "the recent drop in the unemployment rate had been associated with progress in reabsorbing the long-term unemployed into jobs and reducing part-time work, suggesting that slack was diminishing and could be reduced further as employment opportunities expanded."
Turning to normalization, "consistent with the Committee's intention to provide additional information to the public later this year, well before most participants anticipate the first steps in reducing policy accommodation to become appropriate," the panel "expressed general support for the normalization approach outlined by the staff, though some noted reservations about one or more of its features."
That policy includes keeping the "federal funds rate as the key policy rate," and participants backed "a range of 25 basis points for this rate at the time of liftoff and for some time thereafter."
One panelist suggested using the range "as a communication tool rather than as a hard target," while a different member wanted "policy communications during the normalization period" to "focus on the rate of interest on excess reserves (IOER) and the ON RRP rate in addition to the federal funds rate. Participants agreed that adjustments in the IOER rate would be the primary tool used to move the federal funds rate into its target range and influence other money market rates."
