FOMC minutes reveal QE tapering benchmarks
The most recent Federal Open Market Committee minutes from the Federal Reserve shows all participants agreed that the Committee should provide additional clarity about its asset purchase program 'relatively soon.'
However, some on the Committee members believed more gains in the labor market are needed before winding down its quantitative easing program.
Nonetheless, the majority of members thought that the post-meeting statement would be the appropriate vehicle for providing additional information on the Committee’s decision to wind down its bond-buying program.
In their discussion of the future state of monetary policy, the majority of members judged that the outlook for economic activity and inflation warranted the continuation of the Committee’s currently accommodative stance in order to foster a stronger economic and labor recovery.
The two dissenting votes were James Bullard and Esther George. Bullard argued that the Committee should signal more strongly its willingness to defend its goal of 2% inflation rate. Similarly, George continued to have concerns about maintaining aggressive monetary stimulus in the face of a growing economy.
"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," the FOMC minutes noted.
It continued, "Some added that they would, as well, need to see more evidence that the projected acceleration in economic activity would occur, before reducing the pace of asset purchases."
Market experts noted that the FOMC minutes support the majority consensus that the central bank will likely begin tapering its asset purchases in September.
"At the June meeting, the 'several' members (i.e. about four) who were keen to slow the pace of the monthly asset purchases “soon” were outgunned by the 'many' (i.e. about five) who wanted to see further improvement in the labour market first," explained Paul Dales, senior U.S. economist for Capital Economics.
He added, "The strength of June’s employment report, which was released last week, will surely satisfy those members who are more reluctant to pull the trigger."
The Fed’s monthly mortgage-backed securities purchases remain a key part of the housing recovery envisioned by Bernanke, in past speeches. The Committee agreed to continue buying MBS at a pace of $40 billion per month along with longer-term Treasury securities at a pace of $45 billion per month.
Despite the FOMC’s decision to start talking about tapering off purchasing assets, FOMC members made it clear that until inflation and unemployment improve the central bank will stay committed to its accommodation policy.