FOMC minutes point to stable policy

The data: The Federal Reserve today released the minutes of the March 13 FOMC meeting, when the Committee reiterated that “economic conditions […] are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014”, and decided to continue the program of extending the average maturity of the Fed’s holdings of securities as announced in September, and to retain the existing policies regarding the reinvestment of principal payments from Federal Reserve holdings of securities.

Interpretation & outlook: As suggested by the statement, which was released directly after the FOMC meeting, the minutes sounded a bit less concerned about the economic outlook. In particular, meeting participants highlighted the recent improvement in the labor market, while the staff and a few participants revised up their near-term forecasts for GDP growth a little (that said, “most participants did not interpret the recent economic and financial information as pointing to a material revision to the outlook for 2013 and 2014.”).

One of the most interesting paragraphs (to me) highlighted the discussion about the forward guidance (“to keep rates low at least through 2014”). Here is the entire paragraph: “It was noted that the Committee’s forward guidance is conditional on economic developments, and members concurred that the date given in the statement would be subject to revision in response to significant changes in the economic outlook. While recent employment data had been encouraging, a number of members perceived a nonnegligible risk that improvements in employment could diminish as the year progressed, as had occurred in 2010 and 2011, and saw this risk as reinforcing the case for leaving the forward guidance unchanged at this meeting.” That suggests that the only reason why the Fed reiterated its forward guidance despite solid employment gains is that it does not expect this strength to continue. If, therefore, nonfarm payrolls continue to rise at the current pace (about 250,000 per month), the Fed will sooner or later drop the guidance. The reasons why Fed officials remain skeptic have been laid out last week by Chairman Bernanke. Along the same lines, the minutes highlighted that “some participants expressed the view that the recent increases in payrolls likely reflected, in part, a reversal of the sharp cuts in employment during the recession […]. In this view, the recent pace of employment gains might not be sustained if the growth rate of spending did not pick up. Several participants noted that the unseasonably warm weather of recent months added one more element of uncertainty to the interpretation of incoming data, and that this factor might account for a portion of the recent improvement in indicators of employment and housing.”

But at the same time that the Committee has debated to change the forward guidance, “a couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2% over the medium run.” Overall, today’s minutes reveal the whole spectrum of views within the FOMC. To us, the implication is that the Federal Reserve is neither going to tighten its policy reins any time soon, nor will it add any further stimulus in the near future – even as the most influential FOMC members, Chairman Bernanke and his Vice Chairs Yellen and Dudley are still leaning to the cautious side.