NEW YORK – More discussion of normalizing policy was needed and no decisions were made at the Federal Open Market Committee meeting of April 26-27, according to minutes of the meeting, released Wednesday.
Staff defined the difference between normalizing the stance of the policy (withdrawing accommodation) and the conduct (draining reserves) and determined that first, the panel needed to decide “the extent to which the Committee would want to tighten policy, at the appropriate time, by increasing short-term interest rates, by decreasing its holdings of longer-term securities, or both.”
Next, policymakers must determine whether they will vary the pace of any asset sales. “If it chose to make the pace of sales quite responsive to conditions, the FOMC would be able to actively use two policy instruments—asset sales and the federal funds rate target—to pursue its economic objectives, which could increase the scope and flexibility for adjusting financial conditions. In contrast, sales at a pace that varied less with changes in economic and financial conditions and was preannounced and largely predetermined would leave the federal funds rate target as the Committee’s primary active policy instrument, which could result in policy that is more straightforward for the Committee to calibrate and to communicate.”
Also available are reverse repurchase agreements and term deposits, which can “tighten the correspondence between any changes in the interest rate the Federal Reserve pays on excess reserves and the changes in the federal funds rate.”
The FOMC decided any strategy would need to take into account “the Committee’s monetary policy objectives for maximum employment and price stability.” Also, while the panel was prepared to discuss the appropriate strategy for normalizing the stance of policy, it doesn’t mean “the move toward such normalization would necessarily begin soon.”
The FOMC also decided that SOMA’s securities portfolio “would be reduced over the intermediate term to a level consistent with the implementation of monetary policy through the management of the federal funds rate rather than through variation in the size or composition of the Federal Reserve’s balance sheet.” And the holdings would be Treasury securities.
Asset sales would be done in a pattern communicated to the public in advance, and its pace could be adjusted to respond to changes in economic or financial conditions.
Almost all participants agreed “the first step toward normalization should be ceasing to reinvest payments of principal on agency securities and, simultaneously or soon after, ceasing to reinvest principal payments on Treasury securities. Most participants viewed halting reinvestments as a way to begin to gradually reduce the size of the balance sheet. It was noted, however, that ending reinvestments would constitute a modest step toward policy tightening, implying that that decision should be made in the context of the economic outlook and the Committee’s policy objectives.”
The panel acknowledged that the language of its statements regarding forward policy guidance would need to accompany the normalization process.
Policymakers seemed to favor “predetermined and preannounced” asset sales, which could be adjusted to respond to economic outlook changes.
“A majority of participants preferred that sales of agency securities come after the first increase in the FOMC’s target for short-term interest rates, and many of those participants also expressed a preference that the sales proceed relatively gradually, returning the SOMA’s composition to all Treasury securities over perhaps five years.” Should the rate be raised, it would give the FOMC the option to use a rate cut to ease policy, if needed.
The minutes showed that staff believed the economy expanded moderately, and labor market conditions were improving gradually. Consumer spending slowed. Growth projections were largely unchanged. Inflation spikes, they believe, “would be transitory.”
“While rising energy prices posed an upside risk to the inflation forecast, they also posed a downside risk to economic growth. Although most participants continued to see the risks to their outlooks for economic growth as being broadly balanced, a number now judged those risks to be tilted to the downside.”
Turning to monetary policy, “some participants” said with “increased inflation risks and roughly balanced risks to economic growth, the Committee would need to be prepared to begin taking steps toward less accommodative policy,” with some saying a fed funds rate high or asset sale may be warranted later this year, but even so “monetary policy would remain accommodative for some time to come.” Others said with subdued underlying inflation, “longer-term inflation expectations were likely to remain anchored, partly because modest changes in labor costs would constrain inflation trends; and that given the downside risks to economic growth, an early exit could unnecessarily damp the ongoing economic recovery.”
The panel agreed not to change its asset purchase program or its federal funds target range at the meeting.
