The minutes from the December meeting of the Federal Open Market Committee (FOMC) were released and offer a closer look at the deliberations of the Federal Reserve’s monetary policy setting arm. Chairman Ben Bernanke provided a thorough summary of the key decisions and issues in his press conference that followed the December 17-18 meeting (Federal Open Market Committee Meeting Concludes – The Beginning of the End). The committee’s view is that the economic recovery is gaining strength and the outlook going forward is encouraging enough to begin winding down the bond buying program that began in September 2012. The pace of the reductions will be gradual, driven by incoming economic data, and not by a pre-determined schedule. The federal funds target rate will remain at its current low level at least until the unemployment rate falls below 6.5%, and in all likelihood for a considerable period after that threshold is reached. In addition to labor market conditions, the committee will be closely monitoring inflation, which has been below the target rate of 2%, posing a risk to economic growth and potentially signaling a recovery that is weaker than some other indicators suggest.
The minutes provide a more nuanced view of the internal debates than is available from the vote counts supporting or opposing the actions of the committee. The decision to reduce asset purchases had both supporters and opponents, and among the supporters, views on the appropriate pace of reductions differed. Lowering the unemployment rate threshold was debated, as was the role of inflation below the target level as a consideration in adjusting the federal funds target rate.
The committee’s views on the housing sector were encouraging. Despite a slowdown in activity in recent months in response to rising interest rates, expectations were that the housing recovery would continue. A still favorable interest rate environment combined with rising home values, improving employment, incomes and confidence were identified as factors that would continue to support housing demand.
The summary of economic projections released with the minutes expanded on the material released immediately after the December meeting. The materials include meeting participants’ expectations of the level of the federal funds target rate at year end for the years 2013-2016. Most participants expect the first increase to come in 2015, with the funds rate still at or below 1% at the end of 2015, and at or below 2% at the end of 2016. This is consistent with the NAHB forecast of favorable mortgage interest rates supporting continued housing demand throughout the 2014-2015 forecast.