FOMC Minutes: Panel Wanted More Evidence of Progress

Federal Open Market Committee members wanted evidence the progress would be sustained before they reduced asset purchases, and there was talk of reducing purchases of Treasuries, while maintaining the purchase level of mortgage-backed securities, according to minutes of its latest meeting, released Wednesday.

"A few participants expressed a preference for not cutting MBS purchases but reducing purchases only of Treasury securities initially, with the intent of continuing to support the recovery in the housing sector," the minutes state.

While members agreed downside risks "diminished" over the past year, recent "tightening of financial conditions … if sustained, could slow the pace of improvement in the economy and labor market," making it "appropriate" to wait for verification that progress would continue before tapering asset purchases, the minutes note.

Low inflation and "concerns over near-term fiscal uncertainties," weighed heavily on those that wanted to wait for additional "evidence that their expectation of continuing improvement would be realized" before reducing the purchase.

Some discussion touched on market's expectation for decreasing asset purchases and how communications would be affected if the FOMC did not change the buys. "For several members, the various considerations made the decision to maintain an unchanged pace of asset purchases at this meeting a relatively close call."

The minutes note that those who wanted to maintain the pace of asset purchases saw "incoming data as having been on the disappointing side and, despite clear improvements in labor market conditions since the purchase program's inception in September 2012, were not yet adequately confident of continued progress. Many of these participants had revised down their forecasts for economic activity or pointed to near-term risks and uncertainties."

Tighter financial conditions, these members feared, could stall the housing recovery, and a tapering "might trigger an additional, unwarranted tightening of financial conditions, perhaps because markets would read such an announcement as signaling the Committee's willingness, notwithstanding mixed recent data, to take an initial step toward exit from its highly accommodative policy. As a result of such concerns, a number of participants thought that risk-management considerations called for a cautious approach and that, in light of the ambiguous cast of recent readings on the economy, it would be prudent to await further evidence of progress before reducing the pace of asset purchases."

To allay fears of those who expected the Fed to cut back on asset purchases at this meeting, "some participants emphasized a need to clearly communicate the rationale behind any decision not to do so, in order to avoid conveying a message of pessimism regarding the economic outlook or to reinforce the distinction between decisions concerning the pace of purchases and those concerning the federal funds rate.

"One participant suggested that postponing the reduction in the pace of asset purchases would also allow time for the Committee to further discuss and to implement a clarification or strengthening of its forward guidance for the federal funds rate, which could temper the risk that a future downward adjustment in asset purchases would cause an undesirable tightening of financial conditions."

Those in favor of cutting the asset purchases, saw the recent data "as broadly consistent with the Committee's outlook for the labor market at the time of the June FOMC meeting when the contingent expectation that the pace of asset purchases would be reduced later in the year was first presented to the public."

Additionally, they cited "meaningful cumulative progress in labor market conditions since the purchase program began," and not cutting back "could potentially undermine the credibility or predictability of monetary policy by, for example, increasing uncertainty about the Committee's reaction function and about its commitment to the forward guidance for the federal funds rate, with the result of an increase in volatility in financial markets."

Those wanting a reduction also argued that failure to do so could be seen as the FOMC became "more pessimistic about the economic outlook," and could have difficulty explaining the rationale for "a cut in coming months, absent clearly stronger data on the economy and a swift resolution of federal fiscal uncertainties."

Generally, these members wanted "a relatively small reduction to signal the Committee's intention to proceed cautiously."

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