I usually enjoy the day FOMC minutes are released. It is one of the few releases those of us on the West Coast can read at the same time as everyone else without having to get up in what seems like the middle of the night. So I experienced a mix of surprise and disappointment when I arrived at the office and learned that everyone else had already read the release.
As is now well known, the minutes were inadvertently released early. Robin Harding tells the story:
According to two sources in Congress, the accidental release came from Brian Gross, a special assistant to the Board of Governors who works on government relations…
…“A Fed staffer inadvertently sent an email with the minutes to a group of contacts,” said the Fed. “That group of people was mostly Congressional staffers and trade association members in Washington.”
The distribution list, thought to contain about 100 people, is one that the Fed regularly uses to send out releases.
Sounds like an honest mistake – yes, not all mistakes are of the Zero Hedge “it must be a conspiracy” variety. It happens. In any event, the minutes gave a clear indication that FOMC members were leaning toward pulling the plug on asset purchases by the end of this year (emphasis added):
..Members stressed that any changes to the purchase program should be conditional on continuing assessments both of labor market and inflation developments and of the efficacy and costs of asset purchases. In light of the current review of benefits and costs, one member judged that the pace of purchases should ideally be slowed immediately. A few members felt that the risks and costs of purchases, along with the improved outlook since last fall, would likely make a reduction in the pace of purchases appropriate around midyear, with purchases ending later this year. Several others thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end. Two members indicated that purchases might well continue at the current pace at least through the end of the year. It was also noted that were the outlook to deteriorate, the pace of purchases could be increased….
It seems the center of gravity at the FOMC has shifted toward contentment with the current pace of progress in the labor markets. This seems somewhat odd to me; it is as if they were more interested in putting a floor under the recovery rather than trying to accelerate the pace of activity. The desire to pull the plug on the program as soon as possible also seems odd considering that the majority of policy makers find it to be effective:
In their discussion of this topic, meeting participants generally judged the macroeconomic benefits of the current purchase program to outweigh the likely costs and risks, but they agreed that an ongoing assessment of the benefits and costs was necessary. Pointing to academic and Federal Reserve staff research, most participants saw asset purchases as having a meaningful effect in easing financial conditions and so supporting economic growth. Some expressed the view that these effects had likely been stronger during the Federal Reserve’s initial large-scale asset purchases because that program also helped support market functioning during the financial crisis. Other participants, however, saw little evidence that the efficacy of asset purchases had declined over time, and a couple of these suggested that the effectiveness of purchases might even have increased more recently, as the easing of credit constraints allowed more borrowers to take advantage of lower interest rates. One participant emphasized the role of recent asset purchases in keeping inflation from declining further below the Committee’s longer-run goal. A few participants felt that MBS purchases provided more support to the economy than purchases of longer-term Treasury securities because they stimulated the housing sector directly; however, a few preferred to focus any purchases in the Treasury market to avoid allocating credit to a specific sector of the economy.
Surely this suggests that some positive fraction of the current activity is attributable to quantitative easing and thus we can expect that some of that activity to fade when the program is brought to an end. Thus even if the economy accelerates further over the course of this year, ending QE will take some wind out of its sails. And taking the wind out of the sails means risking not achieving escape velocity with respect to the zero bound. They might not believe they are actually removing accommodation when QE ends, but they will not be adding to that accommodation. And the first derivative must be important, otherwise there is no point in discussing changing the pace of asset purchases.
I am heartened a bit to see this:
It was noted that, in addition to the standard channels through which monetary policy affects the economy, asset purchases could help signal the Committee’s commitment to accommodative monetary policy, thereby making the forward guidance about the federal funds rate more effective.
I have long believed that the Fed failed to appreciate the signalling component of quantitative easing. Indeed, I could be convinced it was the most effective channel of transmission. I am glad to see that policymakers are starting to see that as well.
Bottom Line: The Fed seems content with the current pace of activity. Content enough to believe they can pull the plug on quantitative easing this year. I remain concerned that ending QE will slow forward momentum, thus the Fed is running the risk that they the economy will not achieve sufficient velocity to escape the zero bound. The actual timing is still data dependent, but I am wondering if we should change our framework from “how good does the data need to be end QE” to “how bad does the data need to be to continue QE?”
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