FOMC Minutes: Fed will “Taper” in 2013 but not in September

FOMC published minutes of July 30-31 meeting which show that Fed officials were guarded when discussing what to do with QE purchases and decided to wait for more data. Even if they were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to taper this year if the economy strengthens, with a few saying a reduction may be needed soon, several points suggest that “September” will not be appropriate.


A few excerpts from the Fed classified by theme:


1/ Growth
- A number of participants indicated, that they were somewhat less confident about a near-term pickup in economic growth than they had been in June; factors cited in this regard included recent increases in mortgage rates, higher oil prices, slow growth in key U.S. export markets, and the possibility that fiscal restraint might not lessen.
- Nonetheless, some participants felt that, as a result of recent financial market developments, overall financial market conditions had tightened significantly, importantly reflecting larger term premiums, and they expressed concern that the higher level of longer-term interest rates could be a significant factor holding back spending and economic growth.
2/ Employment
- The unemployment rate had declined considerably since then, and recent gains in payroll employment had been solid. However, other measures of labor utilization–including the labor force participation rate and the numbers of discouraged workers and those working part time for economic reasons–suggested more modest improvement, and other indicators of labor demand, such as rates of hiring and quits, remained low.
- While a range of views were expressed regarding the cumulative improvement in the labor market since last fall, almost all Committee members agreed that a change in the purchase program was not yet appropriate.
3/ Inflation
- A few participants, who felt that the recent low inflation rates were unlikely to persist or that the low PCE inflation readings might be marked up in future data revisions, suggested that, as transitory factors receded and the pace of recovery improved, inflation could be expected to return to 2 percent reasonably quickly.
- A number of others, however, viewed the low inflation readings as largely reflecting persistently deficient aggregate demand, implying that inflation could remain below 2 percent for a protracted period.
4/ Financial risks
- Some participants also stated that financial developments during the intermeeting period might have helped put the financial system on a more sustainable footing, insofar as those developments were associated with an unwinding of unsustainable speculative positions or an increase in term premiums from extraordinarily low level.
5/ QE views
- A few members emphasized the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases.
- In the view of the one member who dissented from the policy statement, the improvement in the labor market was an important reason for calling for a more explicit statement from the Committee that asset purchases would be reduced in the near future.
- A few others pointed to the contingent plan that had been articulated on behalf of the Committee the previous month, and suggested that it might soon be time to slow somewhat the pace of purchases as outlined in that plan.
6/ Forward guidance
- Finally, the potential for clarifying or strengthening the Committee’s forward guidance for the federal funds rate was discussed. In general, there was support for maintaining the current numerical thresholds in the forward guidance. A few participants expressed concern that a decision to lower the unemployment threshold could potentially lead the public to view the unemployment threshold as a policy variable that could not only be moved down but also up, thereby calling into question the credibility of the thresholds and undermining their effectiveness.
- Nonetheless, several participants were willing to contemplate lowering the unemployment threshold if additional accommodation were to become necessary or if the Committee wanted to adjust the mix of policy tools used to provide the appropriate level of accommodation.
- A number of participants also remarked on the possible usefulness of providing additional information on the Committee’s intentions regarding adjustments to the federal funds rate after the 6-1/2 percent unemployment rate threshold was reached, in order to strengthen or clarify the Committee’s forward guidance.
- One participant suggested that the Committee could announce an additional, lower set of thresholds for inflation and unemployment; another indicated that the Committee could provide guidance stating that it would not raise its target for the federal funds rate if the inflation rate was expected to run below a given level at a specific horizon.


My view
- Firstly, it’s clear that Fed members will start “tapering” in 2013 to the extent that a few said “it might soon be time to slow somewhat the pace of purchases as outlined in that plan”.
Moreover, it’s clear that financial risks are increasing as “unsustainable speculative positions” have grown.
- Yet, contrary to consensus, I still believe that “tapering” will not start in September because of several factors:
1/ Minutes show that Fed members were a bit more pessimistic about near-term economic performance and they fear the debate on public finances which should take place until the end of September.
2/ As a consequence, they decided to wait for more data. However, the July employment report which was released a few days after this FOMC meeting was disappointing (although the unemployment rate declined to 7.4%).
3/ Fed officials appear to be unconvinced about labor market improvements.
4/ There were mixed views on current low inflation and it’s clear that damage that could come from a rate backup.
5/ Even if some participants (Fisher or Lacker) believe that “tapering” should start in September, they will not vote at the next FOMC meeting.

- Finally, as WSJ’s Hilsenrath noted,  Minutes suggest that changes in interest rate guidance are on the table.