While it was agreed that forward guidance had to change since the 6.5% unemployment threshold was in jeopardy of being breached, Federal Open Market Committee members chose to describe the panel's like reaction to economic events rather than add "new quantitative language," according to the minutes of its latest meeting, released Wednesday.
"Most participants preferred replacing the numerical thresholds with a qualitative description of the factors that would influence the Committee's decision to begin raising the federal funds rate," the minutes noted.
A dissenting member suggested that changing the language of the guidance before the 6.5% threshold was crossed "could be misinterpreted as a signal that the path of policy going forward would be less accommodative."
Also considered was using a 5.5% unemployment threshold and 2.25% inflation. "A few participants proposed adding new language in which the Committee would indicate its willingness to keep rates low if projected inflation remained persistently below the Committee's 2 percent longer-run objective; these participants suggested that the inclusion of this quantitative element in the forward guidance would demonstrate the Committee's commitment to defend its inflation objective from below as well as from above."
However, the general feeling was "it was already well understood that the Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance. Most participants therefore did not favor adding new quantitative language, preferring to shift to qualitative language that would describe the Committee's likely reaction to the state of the economy."
Most participants wanted to offer additional guidance in its statement about "the likely behavior of the federal funds rate after its first increase. For example, the statement could indicate that the Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
A few members wanted to wait until closer to the first rate increase to offer such language.
The March SEP showed an upward shift in federal funds rate projections and some members believed it could wrongly signal "a move by the Committee to a less accommodative reaction function." Others said "the increase in the median projection overstated the shift in the projections."
Still, others felt the uptick in the projections was warranted by improved labor market outlooks of some participants' "and therefore need not be viewed as signifying a less accommodative reaction function."
