Timing The First Move – Honest, We Were Just Talking


With expectations of the pace of retreat from longer term interest rates firmly grounded, attention has turned to the timing of the first move to raise short term interest rates. Some insights into the timing and process were made available in the minutes from the April 29-30 Federal Open Market Committee (FOMC) meeting released by the Federal Reserve.

To avoid the adverse reaction (100 basis point jump in longer term interest rates) experienced last spring when the Fed outlined what the process of winding down its asset purchase program (QE3) might look like, the minutes included the phrases “eventual normalization,” “prudent planning and did not imply that normalization would begin sometime soon,” and “raising short-term interest rates when it becomes appropriate to do so” in the first three sentences to communicate that the discussion was planning for the future.

A presentation included the technical details of a range of policy tools and approaches. The discussion ended with “Participants generally agreed that starting to consider the options for normalization at this meeting was prudent, as it would help the Committee … to communicate its plans to the public well before the first steps in normalizing policy become appropriate.”

In business other than agreeing that the first move for the fed funds rate won’t come until “a considerable time after the asset purchase program ends” (our guess is June 2015), the committee agreed that the economic outlook is generally positive, with the first quarter slowdown weather related and indications that the economy is already bouncing back, although downside risks persist.

The committee agreed that the economic outlook was little changed since the March meeting, with growth strengthening through 2014 and 2015. But the clearest message from the minutes is that for all the talk, short term interest rates are going nowhere fast.

 blog FOMC minutes 2014_05

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