Is Jawboning All The Fed Has Left? Goldman's Take On The FOMC Minutes

It seems from our initial take on the minutes from the last FOMC meeting that there was a lot of talk about how to tell us mere plebeians what they are not capable of doing as opposed to actually doing anything. Maybe, given Bernanke's recent comments and subtle suggestions towards the need for fiscal policy, all the Fed has left is jawboning and their new policy of talking about potential policy. Goldman's rather less pessimistic perspective sees a communications policy aimed at explicit rate paths and they note the unusual inclusion of a 'risks and uncertainties' section - no longer then perhaps Bernanke's '100% sure' view of his actions.


Goldman Sachs: GS Skinny-Communications Options

BOTTOM LINE: November FOMC minutes showed detailed discussion of communication options. We expect the Fed to begin publishing explicit funds rate path at January FOMC meeting.




1.     Minutes from the November 1-2 FOMC meeting showed that Fed officials held a detailed discussion of possible changes to policy communication. The committee debated the following four options, listed here in order of likelihood of being enacted, from most likely to least (based on our assessment): (1) publishing an explicit path for the federal funds rate; (2) specifying an inflation target, and possibly clarifying other aspects of the committee’s longer-run goals; (3) introducing threshold-based policy rules such as the one advocated by Chicago Fed President Evans; and (4) introducing a nominal GDP target.


2.     Publishing a path for the funds rate appeared to have broad support on the committee, and we expect this tool to be introduced at the January FOMC meeting. An inflation target is a closer call, and some officials expressed concerns about this option at the meeting. The committee may ultimately decide go in this direction, but it would probably also need to take other steps that emphasized an equal focus on the other half of the dual mandate. Although the minutes acknowledged that “nominal GDP targeting could, in principle, be helpful in promoting a stronger economic recovery,” a number of participants expressed concern that switching to a new policy framework could heighten uncertainty about future monetary policy, unmooring long-term inflation expectations. As a result, we do not think that threshold-based policy rules or nominal GDP targeting are likely to be introduced by the committee in the near future.


3.     The minutes noted that “a few members” thought that the outlook may warrant further easing, but that “any such accommodation would likely be more effective if it were provided in the context of a future communications initiative”. Unlike recent comments from a few Fed officials (e.g. New York Fed President Dudley’s remarks last week), the minutes did not contain a discussion of purchases of MBS or other securities.


4.     For the first time the minutes included a discussion of “uncertainty and risks” in Fed officials’ economic forecast. Committee members see elevated uncertainty about the outlook, roughly balanced risks around inflation, and downside risks to growth (meaning “they judged that economic growth was more likely to be below their projection of its most likely outcome than above it”).


5.     The remainder of the minutes was broadly in line with the Chairman’s post-meeting press conference.


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