Asset purchases could be decreased "in coming months," as Federal Open Market Committee members expect data to show "ongoing improvement in labor market conditions," which would warrant such action, according to minutes of the panel's latest meeting, released Wednesday.
Also discusses "scenarios under which it might, at some stage, be appropriate to begin to wind down the program before an unambiguous further improvement in the outlook was apparent," according to the minutes. "A couple of participants thought it premature to focus on this latter eventuality, observing that the purchase program had been effective and that more time was needed to assess the outlook for the labor market and inflation; moreover, international comparisons suggested that the Federal Reserve's balance sheet retained ample capacity relative to the scale of the U.S. economy."
Some FOMC members warned that if any criteria other than labor market improvement were to be the spur for reducing asset purchases, "such as concerns about the efficacy or costs of further asset purchases, it would need to communicate effectively about those other criteria. In those circumstances, it might well be appropriate to offset the effects of reduced purchases by undertaking alternative actions to provide accommodation at the same time."
Members opposed a "simple mechanical rule" to automatically adjust the purchases based changes in the unemployment rate or payroll employment. "While some were open to considering such a rule, others viewed that approach as unlikely to reliably produce appropriate policy outcomes," the minutes state.
An alternative offered was to announce a size of asset buys "or a timetable for winding down the program." While a timetable would oppose the data-dependent component of a taper, communicating a timetable would be simple "and might help the public separate the Committee's purchase program from its policy for the federal funds rate and the overall stance of policy."
The discussion also covered when tapering occurs, which asset buys would be reduced which amount. While "a number" thought nearly equal amounts should be used, "some others" suggested cutting back on Treasuries quicker than mortgage-backed securities could "signal an intention to support mortgage markets," while one member said "trimming MBS first would reduce the potential for distortions in credit allocation."
The panel also discussed "clarifying or strengthening the forward guidance for the federal funds rate, including by providing additional information about the likely path of the rate either after one of the economic thresholds in the current guidance was reached or after the funds rate target was eventually raised from its current, exceptionally low level."
While cutting the 6.5% unemployment rate threshold was brought up, some panelists "noted that such a change might raise concerns about the durability of the Committee's commitment to the thresholds."
Another topic raised was "the merits of stating that, even after the unemployment rate dropped below 6½ percent, the target for the federal funds rate would not be raised so long as the inflation rate was projected to run below a given level." Members saw the benefit of such as statement as "uncertain" and probably "rather modest," while communicating it may be challenging.
Participants decided to "continue reviewing these issues of longer-run policy strategy at upcoming meetings. No decisions on the substance were taken, and participants generally noted the usefulness of planning for various contingencies," the minutes said.
The FOMC said the economy was expanding moderately, although household expectations of labor markets "deteriorated somewhat." Projections for near-term GDP were "revised down somewhat," mostly due to the government shutdown. Also, members saw several risks. "The downside risks to economic activity included the uncertain effects and future course of fiscal policy, concerns about the outlook for consumer spending growth, and the potential effects on residential construction of the increase in mortgage rates since the spring. With regard to inflation, the staff saw risks both to the downside, that the low rates of core consumer price inflation posted earlier this year could be more persistent than anticipated, and to the upside, that unanticipated increases in energy or other commodity prices could emerge."
The committee decided to continue buying $40 billion of MBS and $45 billion of Treasuries a month. Federal Reserve Bank of Kansas City President Esther L. George dissented, saying the "continued aggressive easing of monetary policy" was not "warranted" based on "both actual and forecasted improvements in the economy." She backed "taking steps toward slowing the pace of the Committee's asset purchases. Moreover, market expectations for the size of the purchase program had continued to escalate despite that progress, increasing her concerns about communications challenges and the potential costs associated with asset purchases."