Despite discussing exit strategy from its quantitative easing program, Federal Open Market Committee members expressed concern about a weakening labor market and a recovery that seemed slower than expected, according to minutes of the FOMC’s June 21-22 meeting released Tuesday.
The panel noted that the recovery, while moderate, seemed to be slower than had been expected at the last meeting, but deemed it was “transitory factors” that restrained growth. The panel expected the recovery to continue apace once these factors subside, but again saw the near-term outlook less rosy than they did at their April meeting.
“This judgment reflected the persistent weakness in the housing market, the ongoing efforts by some households to reduce debt burdens, the recent sluggish growth of income and consumption, the fiscal contraction at all levels of government, and the effects of uncertainty regarding the economic outlook and future tax and regulatory policies on the willingness of firms to hire and invest,” the minutes noted.
Downside risks, according to the panel, include the possibility of more weak economic activity, house price declines, fiscal tightening, and spillover from Europe’s woes.
Employment data was “disappointing” with elevated claims data.
“The recent deterioration in labor market conditions was a particular concern for FOMC participants because the prospects for job growth were seen as an important source of uncertainty in the economic outlook, particularly in the outlook for consumer spending,” according to the minutes
The exit strategy talks were deemed “prudent planning and did not imply that a move toward such normalization would necessarily begin sometime soon.”
The exit strategy begins with the end of reinvesting payments of principal on System Open Market Account securities holdings, followed by changes in “forward guidance on the path of the federal funds rate,” with “temporary reserve-draining operations aimed at supporting the implementation of increases in the federal funds rate when appropriate.”
After that, and when “conditions warrant,” rate hikes will begin, and will become “the primary means of adjusting the stance of monetary policy.”
The minutes noted that the FOMC “is prepared to make adjustments to its exit strategy if necessary in light of economic and financial developments.”