The Federal Reserve released the minutes from the Federal Open Market Committee (FOMC) meeting held July 29-30. Following its standard procedure the Fed released a statement immediately following the meeting announcing the major policy decisions, and released the minutes from the meeting, providing a more in-depth view of the deliberations, three weeks later.
While there was a general recognition that the economic recovery is moving forward, there was also the recognition that the pace has been slow. Economic activity recovered from its first quarter slump and is expected to continue growing but only moderately. Labor market conditions are improving but long-term unemployment and underemployment undercut the apparent improvement reflected in the unemployment rate. Inflation has moved closer to the Fed’s target rate of 2% but resource slack points to the possibility of an extended period where inflation remains below that target.
This combination of progress and unfinished business sets the stage for the Fed’s planning, but not yet executing, the beginning of the retreat from its extraordinary policy accommodation. The economic recovery is on track with projections by FOMC participants so that asset purchases are likely to end later this year. The planning has shifted to when we will see “lift-off” in the federal funds rate, the first move up from its current 0-25 basis point target. The consensus among analysts is sometime in mid-2015, but a notable minority expect it sooner.
A reduction in the balance sheet was also part of the deliberations. The reigning view is that this should be done gradually, predictably, and with communication to the public well in advance of any first steps.
The aspect of the balance sheet normalization process most relevant to housing is the plan to not sell MBS. While the primary focus of the normalization discussion is to do so in a way that avoids disruption to the financial markets and the broader economy, policymakers recognize that the housing sector recovery remains weak. As much as some meeting participants would prefer to make monetary policy more neutral with regard to sectors of the economy, the consensus is that the potential shock to mortgage interest rates given the state of the housing sector is worth avoiding.