Minutes from the Federal Reserve’s eight-times-per-year meeting of the Federal Open Market Committee hit the streets early and with the a bang. The implications hidden within the 24 pages of text is that the central bank should begin tapering its bond program later this year and stop it completely by the end of the year as economic conditions are slowly improving.
“Generally favorable U.S. economic data releases, along with communications from Federal Reserve policymakers regarding the outlook for the economy and monetary policy, appeared to contribute to improved sentiment in domestic financial markets over the intermeeting period despite some renewed concerns about economic and financial conditions in Europe,” the Federal Reserve wrote in its just released FOMC minutes. The information — initial claims for unemployment, housing statistics, and retail sales — reviewed by the United States’ central bankers at their March 19 through 20 meeting — indicated that U.S. economic activity was expanding at a moderate rate in the first quarter of 2013 after the slowdown late last year.
The minutes noted that the “some observers” have suggested that the lengthy period of low long-term rates kept in place by the Federal Reserve could encourage excessive risk-taking, which, in turn, could have “adverse consequences for financial stability at some point in the future.” According to the minutes, the staff has surveyed a range of asset markets and financial institutions for evidence of immoderate valuations, leverage, or risk-taking. But no “significant financial imbalances” were found…
Rather, the Fed said that the low interest rates have likely supported gains in asset prices and helped businesses and households access credit. The Federal Reserve did note that trends in a few specific markets did warrant additional analysis, and the central bank’s staff will continue to monitor those markets for signs of instability…
Meeting participants — which included the 7 members of the Board of Governors and the presidents of the 12 Federal Reserve Banks — submitted their assessments for output growth, unemployment, and the target federal funds rate for each year from 2013 to 2015. In general, they agreed that the economic data was slightly more positive than had been expected, but that “fiscal policy appeared to have become more restrictive, leaving the outlook for the economy little changed on balance since the January meeting.” Yet, participants judged that the economy has returned to moderate growth after hitting a bump late last year, noting that several downside risks have diminished.
Since the January meeting, conditions in the labor market have improved — although unemployment remained elevated, spending by households and businesses has continued to expand, and the housing market strengthened further. But, “participants thought that the Fed’s fiscal policy was exerting significant near-term restraint on the economy.”
For now, during their discussion of monetary policy, members decided to continue purchasing mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month because the economic outlook has “little changed” since the previous meeting. While members stressed that any changes to the purchase-asset program should be conditional on continuing assessments of the labor market and changes in inflation as well as the efficacy and costs of the purchases. Only one member dissented from the policy decision, contending that the continued high level of monetary accommodation has increased the risks of future economic and financial imbalances.
Given the economic data reviewed by the Committee in mid-March, several members believed that the improved outlook since last fall would make a “reduction in the pace of purchases appropriate around midyear,” while still others “thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end.”
The Committee also retained its forward guidance regarding the federal funds rate, including its dual threshold on the unemployment and inflation rates.