NEW YORK – The forward guidance of easy monetary policy through 2014 is “subject to revision” should “significant” improvement is seen in the economy, according to minutes of the most recent Federal Open Market Committee meeting, released Wednesday.
Citing appearance of strengthening in early 2010 and early 2011 that didn’t pan out, and the mild winter, panelists decided to leave “forward guidance unchanged at this meeting,” changing it “only once they were more confident that the medium-term economic outlook or risks to the outlook had changed significantly.”
Some members felt the recovery was gaining “durability,” although others felt it was too soon to determine a permanent trend, since temporary factors have contributed to the growth
“The incoming information led some participants to become more confident about the durability of the recovery,” the minutes state. “However, others thought it was premature to infer a stronger underlying trend from the recent positive indicators, since those readings may partially reflect the effects of the mild winter weather or other temporary influences.”
The panel said slow foreign economic growth, stalled household income growth, and ongoing “depressed” housing markets continue to stymie the recovery. Also, government spending, they said, will be a “drag” on growth.
“They generally saw the U.S. fiscal situation also as a risk to the economic outlook; if agreement is not reached on a plan for the federal budget, a sharp fiscal tightening could occur at the start of 2013,” according to the minutes.
But, FOMC members believe most of these factors will “ease over time” and “recovery would gradually gain strength.”
“However, other participants saw upside risks to the inflation outlook given the recent pickup in inflation and the highly accommodative stance of monetary policy,” the minutes note.
The economy continues to “expand moderately,” with labor markets improving, business and household spending increasing, and “signs of improvement in the housing sector,” the minutes noted.
The panel determined broad financial market conditions were little changed since Match, when they last met, although asset prices “fluctuated substantially” based on economic outlooks and changing expectations for future monetary policy.
Near-term projections for real gross domestic product growth were “slightly” increased, based on lower unemployment numbers and stronger-than-expected consumer spending. While continued gradual acceleration in GDP is expected through 2014, the jobless rate was still expected to be “elevated” at that time.
Inflation was slightly higher than March estimates, and since pass-throughs of oil price increases appear “nearly complete” as prices have started to dip, the panel believes inflation will stay “subdued” through 2014.
“Overall, most participants viewed the risks to their inflation outlook as being roughly balanced,” the minutes said. “However, some participants saw a risk that inflation pressures could increase as the expansion continued; they pointed to the fact that inflation was currently above target and were skeptical of models that rely on economic slack to forecast inflation partly because of the difficulty in measuring slack, especially in real time. These participants were concerned that maintaining the current highly accommodative stance of monetary policy over the medium run could erode the stability of inflation expectations and risk higher inflation. In this regard, one participant noted the potential risks and costs associated with additional balance sheet actions.”
The FOMC also discussed the benefits of “simple monetary policy rules.” While some members praised the rules for indicating “how policy should systematically respond to changes in economic conditions,” which could make the relationship clear between “appropriate monetary policy and the evolution of the economic outlook,” others “were more skeptical.” One member said “prescriptions from rules” could serve as benchmarks, when using the rules “mechanically” could be “counterproductive.”
Another panelist “questioned the value of interest rate rules when the policy rate is constrained by the zero lower bound on nominal interest rates and unconventional policy options are being used.” Some members felt the rules could be “appropriately adjusted” as a result. Further discussion is expected on “potential merits and drawbacks of using simple rules as guides to monetary policy decisionmaking and for communications”
The committee discussed using an exercise where participants would offer their views on appropriate monetary policy responses under alternative economic scenarios, but took no action.