The Federal Open Market Committee apparently had a long discussion about whether or not to keep the phrase "considerable time" in its statement regarding how long it would keep the fed funds rate target zero lower bound after its asset purchase program was ended, according to minutes from its Oct. 28-29 meeting, released Wednesday.
While the panelists agreed the first increase in the rate would be based on incoming economic data, the wording of its statement brought a variety of responses.
"Most participants judged that it would be helpful to include new language in the Committee's forward guidance to clarify how the Committee's decision about when to begin the policy normalization process will depend on incoming information about the economy," the minutes note. "Some" members wanted to eliminate the words "considerable time," because they believe "such a characterization could be misinterpreted as suggesting that the Committee's decisions would not depend on the incoming data."
Others, wanted the phrase retained, with additional language assuring lift-off would be data-dependent, because they felt removing the words "might be seen as signaling a significant shift in the stance of policy, potentially resulting in an unintended tightening of financial conditions."
Also, one member wanted the FOMC to "strengthen" guidance to "underscore" its commitment to 2% inflation.
Still, some members stated "current forward guidance might be read as suggesting an earlier date of liftoff than was likely to prove appropriate, given the outlook for inflation and the downside risks to the economy associated with the effective lower bound on interest rates."
Turning to the speed of rate increases once policy normalization begins, "a number" of panelists expressed a desire to "clarify the Committee's likely approach."
Communicating post-liftoff policy could be challenging, "given the inherent uncertainty of the economic and financial outlook and the Committee's desire to retain flexibility to adjust policy in response to the incoming data."
In the end, "Most participants supported retaining the language in the statement indicating that the Committee anticipates that economic conditions may warrant keeping the target range for the federal funds rate below longer-run normal levels even after employment and inflation are near mandate-consistent levels."
Regarding the labor market, the panel saw "some underutilization" that "appeared to be gradually diminishing."
The panel also discussed whether to mention financial market developments in its post-meeting statement. While a reference would be a reminder the FOMC was monitoring financial developments, participants felt it may suggest "greater concern on the part of the Committee than was actually the case, perhaps leading to the misimpression that monetary policy was likely to respond to increases in volatility."
The panel nixed the idea.
A suggestion to include a statement about foreign economic developments increasing uncertainty or raising downside risk was rejected as too pessimistic.
Panelists "generally agreed" the asset purchase program achieved its purpose and all but one member approved ending the purchases, while "maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency MBS in agency MBS and of rolling over maturing Treasury securities at auction."
Data on economic activity "was close to expectations," so GDP projections for the remainder of the year were "little revised."
"However, in response to a further rise in the foreign exchange value of the dollar, a deterioration in global growth prospects, and a decline in equity prices, the staff revised down its projection for real GDP growth a little over the medium term," the minutes said. "Even with the slower expansion of economic activity in this projection, real GDP was still expected to rise faster than potential output in 2015 and 2016, supported by accommodative monetary policy and a further easing of the restraint on spending from changes in fiscal policy; in 2017, real GDP growth was projected to step down toward the rate of potential output growth."
Inflation projections were lowered based on lower oil prices.
Risks to the GDP and inflation forecasts "were seen as tilted to the downside," based on "financial developments" and foreign economic outlooks "as well as the staff's assessment that neither monetary policy nor fiscal policy appeared well positioned to help the economy withstand adverse shocks."
Risks to the unemployment rate outlook was termed "roughly balanced."
While lower oil prices will tamp inflation in the near-term, members felt inflation would increase toward 2% in coming years, "although a few expressed concern that inflation might persist below the Committee's objective for quite some time."
The volatility in the financial markets was fueled by "a number of technical factors" and "worries about a possible spread of Ebola." "The expected path of the federal funds rate implied by market quotes shifted down notably, on net, over the period," the minutes noted. "Market-based measures suggested that the expected date of the first increase in the federal funds rate was pushed out from the third quarter of 2015 to late 2015. However, the results from the Desk's October Survey of Primary Dealers indicated that the dealers' projected path of the federal funds rate was little changed from the September survey, with dealers continuing to see the middle of next year as the most likely time of liftoff."
There was discussion about overnight reverse repurchase operations, and a proposal to change interest rates based on a public schedule. "Varying the spread between the ON RRP rate and the interest on excess reserves rate could provide the Committee with information about the effect of that spread on money markets and the demand for ON RRP. In addition, changes in the ON RRP rate would provide further information about the effectiveness of an ON RRP facility in providing a floor for money market rates during policy normalization."
The FOMC approved varying the offering rate from zero to 10 basis points.
