Members of the Federal Open Market Committee decided the time was appropriate to disseminate information regarding normalization, and they also discussed current forward guidance and what was being implied about liftoff, according to minutes of the meeting, which were released Wednesday.
Agreeing that liftoff would be determined by economic data and outlook, "several" meeting participants opined current guidance "suggested a longer period before liftoff, and perhaps also a more gradual increase in the federal funds rate thereafter, than they believed was likely to be appropriate given economic and financial conditions."
There was also concern that using "considerable time" in the statement "could be misunderstood as a commitment rather than as data dependent." But it was noted that guidance "clearly indicated" policy is dependent "on its ongoing assessment of realized and expected progress toward its objectives of maximum employment and 2 percent inflation, and that its assessment reflected its review of a broad array of economic indicators."
Also, the statement, members noted, did not rely on a calendar date.
Discussion about altering the guidance when it "no longer appropriately conveys its intentions about the future stance of policy," showed members preferred "clarifying the dependence of the current forward guidance on economic data and the Committee's assessment of progress toward its objectives of maximum employment and 2 percent inflation."
Other suggestion included using a numerical threshold, based on inflation, a view other members thought would be difficult to express "in terms of numerical thresholds for some set of economic variables."
In terms of labor, "many members" still saw "significant slack," although "[a] few members, however, expressed reservations about continuing to characterize the extent of underutilization of labor resources as significant."
The panel decided to say condition "improved somewhat further, but that the unemployment rate was little changed and a range of labor market indicators continued to suggest that there remained significant underutilization of labor resources."
Inflation, they determined, was progressing toward the 2% target earlier this year, but fell back "somewhat" recently.
"A couple of participants" pushed for "greater allowance for sales of agency mortgage-backed securities (MBS) over the next few years," while a "few" said they'd prefer "the principles point to an earlier end to the reinvestment of repayments of principal on securities held in the SOMA portfolio."
The minutes stated, "Some participants noted that expectations for the path of the federal funds rate implied by market quotes appeared to remain below most of the projections of the federal funds rate provided by Committee participants in the SEP, which represent each individual participant's assessment of the appropriate path for the federal funds rate consistent with his or her economic outlook. However, it was pointed out that measures of financial market participants' expectations incorporate their judgments regarding not only the most likely outcomes, but also the possible downside tail risks that might be associated with especially low paths for the federal funds rate."
Normalization talks included a discussion of "changes to the ongoing [overnight reverse repurchase agreement] ON RRP exercise to test possible design features that could allow an ON RRP facility to serve as an effective supplementary tool during policy normalization while also mitigating the potential for unintended effects in financial markets."
Among the changes were increasing "the counterparty-specific limit from $10 billion to $30 billion, limiting the overall size of each operation to $300 billion, and introducing an auction process that would be used to determine the interest rate on such operations and allocate take-up if the sum of bids exceeded the overall limit."
The tests are intended to show how an ON RRP facility should be "structured to best balance its objectives of supporting monetary control and of limiting the Federal Reserve's role in financial intermediation as well as reducing potential financial stability risks the facility might pose during periods of stress."
Other tests, members said, could include "a daily time-varying cap along with the overall limit on the size of ON RRP operations, small variations in the offered rate on ON RRP operations, and moderate increases and decreases in the overall size limit."
Some members worried "that these tests could be misunderstood as providing a signal of the Committee's intentions regarding the parameters of the ON RRP program that will be implemented when normalization begins; they wanted to emphasize that the tests are intended to provide additional information to guide the Committee's decisions."
