The Federal Reserve released the minutes from the Federal Open Market Committee (FOMC) meeting held in October, providing a more in-depth view of their deliberations than can be gleaned from the post-meeting statement.
The minutes make clear the widespread agreement among participants that the asset purchase program had achieved its stated goal of substantial improvement in the outlook for the labor market and should be concluded. The focus of deliberations has shifted to the potential threats posed by persistent below-target inflation and a weakening global economy, but also the challenge of maintaining financial system stability during the process of monetary policy normalization.
Concern about below-target inflation was amplified by weaker foreign economies, Europe, China and Japan, in particular. But the benefits of lower energy prices and longer-term interest rates were viewed as offsets that would keep the domestic economy on track.
The importance of communicating the appropriate timing and path of increases in the federal funds rate has kept the language used in post-meeting statements in the discussion. The phrase “considerable time” as the best characterization for when, after the end of asset purchases, to begin increasing the funds rate has been a topic in recent meetings. Language was added to the statement following the October meeting to emphasize that the timing would be data driven and not calendar based. Faster progress toward the objectives of full employment and 2.0% inflation would motivate an earlier liftoff while slower progress would delay liftoff.
Effective communication to the public of the direction of monetary policy is critical to maintaining financial system stability. A misunderstanding of the Fed’s intentions led to a spike in longer-term interest rates in the summer of 2013 when then-Chairman Ben Bernanke raised the subject of how the eventual end of the asset purchases might unfold. Avoiding a similar misunderstanding that could potentially disrupt short-term lending markets is uppermost in committee members’ minds.
Fortunately, starting under Chairman Bernanke and now continuing with Chairwoman Janet Yellen effective communication has been a policy goal at the Fed for a considerable time.