Key highlights: "Participants viewed the weakness in first-quarter economic growth as likely to be largely transitory, influenced by unusually severe weather, increases in energy and other commodity prices, and lower-than-expected defense spending. As a result, they saw economic growth picking up later this year....Recent increases in consumer food and energy prices, together with the small uptick in core consumer price inflation, led the staff to raise its near-term projection for consumer price inflation. However, inflation was expected to recede over the medium term, as food and energy prices were anticipated to decelerate...Nearly all participants indicated that the first step toward normalization should be ceasing to reinvest payments of principal on agency securities and, simultaneously or soon after, ceasing to reinvest principal payments on Treasury securities....A few members remained uncertain about the benefits of the asset purchase program but, with the program nearly completed, judged that making changes to the program at this time was not appropriate...The participants who favored earlier sales also generally indicated a preference for relatively rapid sales, with some suggesting that agency securities in the SOMA be reduced to zero over as little as one or two years. Such an approach was viewed as allowing for a faster return to a normal policy environment, potentially reducing any upside risks to inflation stemming from outsized reserve balances, and more quickly eliminating any effects of SOMA holdings of agency securities on the allocation of credit."
Stone McCarthy's Take Away:
- The FOMC made no decision regarding the exact combination of timing and procedures to exit the current extremely easy stance of monetary policy.
- The Committee made distinctions between the stance of policy and normalizing the conduct of policy -- how it implemented the removal of accommodation.
- The first step in easing would be passive, i.e. ending the reinvestment of maturing securities and principal prepayments as a "modest step" towards tightening.
- The second step in easing would be active and raise the fed funds rate target, and that the majority of the Committee favor this approach over selling assets.
On the whole, we read the April 26-27 FOMC meeting minutes as a communication from the Committee regarding its intentions toward and preparedness for an exit from the current extremely easy stance of monetary policy and huge balance sheet. The minutes said that no decisions have as yet been reached, and that further discussion will take place.
Nonetheless, the Committee provided a much clearer picture of the options they have in the exit process, and how conditions could influence the decision making process.
The timing of the exit is still some distance away, but the extensive and detailed discussion in the minutes suggests that the Committee does see conditions are such that the end is now in sight. Normalization of both the stances of policy -- from the enormous size of the balance sheet and near-zero fed funds rate target -- will happen at "the appropriate time." We think that the Committee has increasing evidence of a sustained economic recovery and a less subdued outlook for inflation. If the labor market continues to mend as it has inthe last few months, it seems probable that the FOMC will finally alter its communications and signal the end of the "extended period."
Full minutes: Fomc Minutes April