The Federal Reserve will consider an alternative to the federal funds rate to indicate short-term interest rate levels, according to the minutes from the FOMC's April 30-May 1 meeting, which were released Wednesday.
Several members suggested "the federal funds rate might not, in the future, be the best indicator of the general level of short-term interest rates, and supported further staff study of potential alternative approaches to implementing monetary policy in the longer term and of possible new tools to improve control over short-term interest rates."
The Federal Open Market Committee also determined the Fed's exit strategy principles stated in June 2011 are "generally still valid," but need to be more flexible.
"The broad principles adopted almost two years ago appeared generally still valid, but developments since then-including the change in the size and composition of SOMA asset holdings- suggested a need for greater flexibility regarding the details of implementing policy normalization, particularly because those details would appropriately depend at least in part upon future economic and financial developments," according to the minutes.
Further, with "normalization" still "well in the future," the minutes said, "the Committee might wish to wait and acquire additional experience to inform its plans. In particular, the process of normalizing policy could yield information about the most effective framework for implementing monetary policy in the longer run, and thus about the appropriate size of the SOMA portfolio and level of reserve balances."
There was discussion of whether to merely note that certain parts of the principles were outdated or whether a formal revision should be made. "Participants emphasized that their review of the June 2011 exit strategy principles did not suggest any change in their views about the economic conditions that would eventually warrant beginning the process of normalizing the stance of monetary policy."
The issue will be considered again.
Turning to policy, the FOMC saw "moderate" economic growth and improved labor markets, despite an "elevated" unemployment rate.
"Household spending and business fixed investment advanced, and the housing sector had strengthened further, but fiscal policy was restraining economic growth. The Committee expected that, with appropriate monetary policy accommodation, economic growth would proceed at a moderate pace and result in a gradual decline in the unemployment rate toward levels that the Committee judged consistent with its dual mandate," according to the minutes.
The panel, with one exception, agreed "a highly accommodative stance of monetary policy was warranted in order to foster a stronger economic recovery in a context of price stability."
The FOMC decided to continue buying "MBS at a pace of $40 billion per month and purchases of longer-term Treasury securities at a pace of $45 billion per month, as well as to maintain the Committee's reinvestment policies. The Committee also retained its forward guidance about the federal funds rate, including the thresholds on the unemployment and inflation rates."
A "few" officials were concerned "investor expectations of the cumulative size of the asset purchase program appeared to have increased somewhat since it was launched last September despite a notable decline in the unemployment rate and other improvements in the labor market since then." Others felt the expectations "had changed little, on net, since the program was launched or had responded appropriately to incoming information."
The group "generally agreed" on the need for clear communication that the "pace and ultimate size of its asset purchases would depend on the Committee's continued assessment of the outlook for the labor market and inflation in addition to its judgments regarding the efficacy and costs of additional purchases and the extent of progress toward its economic objectives."
Kansas City Federal Reserve Board President Esther "George dissented because she continued to view monetary policy as overly accommodative and therefore s posing risks to the long-term sustainable growth of the economy. She expressed concern that the stance of policy might be fostering imbalances and excessive risk-taking in some financial markets and institutions, and she cited the potential for the Committee's ongoing asset purchases to complicate the future conduct of policy, raise uncertainty, and affect future inflation expectations."
George pushed for a "signal" of "a near-term tapering of asset purchases, which would begin to move policy toward a more appropriate stance."