Yesterday night, the FOMC published Minutes of the June 18-19 meeting which gave more details regarding the timing the Fed could choose to slow the pace of asset purchases. According to the report, it appeared that tapering will not begin as early as some had espected because:
1/ Before “tapering” Fed members need to reduce uncertainty about how the Committee might adjust its purchases in response to economic developments. As an illustration, several participants pointed to the challenge of making it clear that policymakers necessarily weigh a broad range of economic variables and longer-run economic trends in assessing the outlook. Moreover, some suggested providing forward guidance about asset purchases based on numerical values for one or more economic variables:
Participants discussed how best to communicate the Committee’s approach to decisions about its asset purchase program and how to reduce uncertainty about how the Committee might adjust its purchases in response to economic developments. Importantly, participants wanted to emphasize that the pace, composition, and extent of asset purchases would continue to be dependent on the Committee’s assessment of the implications of incoming information for the economic outlook, as well as the cumulative progress toward the Committee’s economic objectives since the institution of the program last September. The discussion centered on the possibility of providing a rough description of the path for asset purchases that the Committee would anticipate implementing if economic conditions evolved in a manner broadly consistent with the outcomes the Committee saw as most likely. Several participants pointed to the challenge of making it clear that policymakers necessarily weigh a broad range of economic variables and longer-run economic trends in assessing the outlook. As an alternative, some suggested providing forward guidance about asset purchases based on numerical values for one or more economic variables, broadly akin to the Committee’s guidance regarding its target for the federal funds rate, arguing that such guidance would be more effective in reducing uncertainty and communicating the conditionality of policy.
Participants generally agreed that the Committee should provide additional clarity about its asset purchase program relatively soon. A number thought that the postmeeting statement might be the appropriate vehicle for providing additional information on the Committee’s thinking. However, some saw potential difficulties in being able to convey succinctly the desired information in the postmeeting statement. Others noted the need to ensure that any new statement language intended to provide more information about the asset purchase program be clearly integrated with communication about the Committee’s other policy tools. At the conclusion of the discussion, most participants thought that the Chairman, during his postmeeting press conference, should describe a likely path for asset purchases in coming quarters that was conditional on economic outcomes broadly in line with the Committee’s expectations. In addition, he would make clear that decisions about asset purchases and other policy tools would continue to be dependent on the Committee’s ongoing assessment of the economic outlook.
2/ Many Fed members believe that further improvement of the labour market situation is necessary before it would be appropriate to cut the pace of asset purchases:
While recognizing the improvement in a number of indicators of economic activity and labor market conditions since the fall, many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases.
In my analysis of the June employment report, I demonstrated that even if nonfarm payrolls accelerate slightly and unemployment rate remains unchanged, the situation is still depressed because qualitative indicators deteriorate (full time jobs, underemployment rate…). This opinion was shared by Bernanke who made a statement last night and insisted on the fact that:
1/ Fed should maintain accommodation even as the minutes of policy makers’ June meeting showed them debating whether to stop bond buying by the Fed in 2013.
2/ Current unemployment rate of 7.6% may overstate the health of labor market.
As a consequence, I still believe that Fed will not slow the pace of asset purchases until at least December.