In a well-crafted 688 words published just 5 minutes after the minutes were exposed to the public, the Wall Street Journal's Jon Hilsenrath provides what bullish equity market believers might consider one of his more hawkish commentaries on what the Fed is really thinking. "Federal Reserve officials turned their attention to longer-run issues at their April policy meeting," he noted; adding that discussion of the Fed's "exit strategy" from low interest rates has heated up in recent weeks. His summation - lots of talk, no action... not what the bad-news-is-good-news crowd wants to hear.
Federal Reserve officials turned their attention to longer-run issues at their April policy meeting, while concluding that their outlook for a gradually improving economy hadn't changed much in the previous weeks and warranted no change in policy.
They spent considerable time discussing how to manage interest rates when they eventually start to raise credit costs, but came to no conclusion on the matter, according to minutes of the April 29-30 meeting, which were released Wednesday with their regular three-week lag.
Moreover, they spoke at some length on an issue that has nagged at them for years—how to better communicate their thinking on the outlook for interest rates to the public. Some wanted the Fed to more clearly explain why officials believed interest rates can stay low even as unemployment falls. Others wanted to provide more clarity on how long it will keep its large portfolio of securities holdings. On those issues, too, they came to no new conclusions.
"In their discussion of the economic situation and the outlook, meeting participants generally indicated that their assessment of the economic outlook had not changed materially since the March meeting," the minutes said.
Public discussion of the Fed's "exit strategy" from low interest rates has heated up in recent weeks. William Dudley, president of the Federal Reserve Bank of New York,discussed the issue at length in a speech in New York on Tuesday.
The minutes showed the issue got a lengthy airing at the April meeting, with presentations from staff on the central bank's options, but the main conclusion was that officials need to keep testing their tools.
At the center of this debate: $4.3 trillion of securities held by the Fed and $2.6 trillion of money the central bank has pumped into the banking system known as reserves. Traditionally, when the Fed has raised interest rates, it has made small reductions in the supply of reserves in the banking system to push short-term bank borrowing costs. Because there are so many reserves now, it is exploring other options.
"A staff presentation outlined several approaches to raising short-term interest rates when it becomes appropriate," the minutes said. This included discussions of instruments called reverse repurchase agreements and a term deposit facility. Fed officials agreed to continue testing these programs without committing to an approach. "Participants requested additional analysis from the staff and agreed that it would be helpful to continue to review these issues at upcoming meetings," the minutes said.
The Fed aired a variety of low-level concerns about the broader economy at the meeting. Severe winter weather slowed activity in the first quarter. Output appeared to be reviving, though "some participants remarked that it was too early to confirm that the bounceback in economic activity would put the economy on a path of sustained above-trend economic growth."
"A number of participants pointed to possible sources of downside risk to growth, including a persistent slowdown in the housing sector or potential international developments, such as a further slowing of growth in China or an increase in geopolitical tensions regarding Russia and Ukraine," the minutes added.
Weighing against those worries, a number of officials "noted that business contacts in many parts of the country were generally optimistic about economic prospects, with reports of increased sales of automobiles, higher production in the aerospace industry, and increased usage of industrial power; in addition, a couple of firms with a global presence reported a notable increase in demand from customers in Europe."
In Fed staff projections, the outlook for economic growth in the first half of the year was "somewhat slower" than at the previous meeting. But its medium-run projection was unchanged.
"The staff continued to project that real [gross domestic product] would expand at a faster pace over the next few years than it did last year," the minutes said. "The faster pace of real GDP growth was expected to be supported by an easing in the restraint from changes in fiscal policy, increases in consumer and business confidence, further improvements in credit availability and financial conditions, and a pickup in the rate of foreign economic growth."
The staff inflation forecast wasn't changed.