Highlights of the Minutes from the March 19 & 20 FOMC Meeting


 
Author: RBC Financial Group Economics Department
Location: Toronto
Date: 2013-04-11

The Minutes of the March 19 and 20, 2013 Federal Open Market Committee (FOMC) meeting (which were released ahead of schedule as a result of an inadvertent early release to some Congressional staffers) provided the details of the discussion surrounding the Committee’s decision to leave its monetary policy stance unchanged.

Committee members viewed the economic data received during the period since the last FOMC meeting at the end of January as being somewhat more positive than expected; however, fiscal policy appeared to have become more restrictive, thereby resulting in the overall economic outlook being little changed. The US economy was judged to have returned to moderate growth in the first quarter of 2013 following a “pause” at the end of 2012, while a few meeting participants noted that downside risks to the outlook “may have diminished.” It was generally anticipated that growth would “proceed at a moderate pace” and that the unemployment rate would decline gradually toward levels consistent with the Fed’s full-employment mandate. Inflation was viewed as running below the FOMC’s 2% objective and “nearly all” participants expected that it would run “at or below” 2% in the medium term.

The discussion of monetary policy again focused on the costs and benefits associated with continued purchases of mortgage-backed securities (MBS) and longer-term Treasury securities. Meeting participants generally viewed the macroeconomic benefits of the current asset purchase program (MBS purchases at a pace of $40 billion per month, purchases of longer-term Treasuries at a pace of $45 billion per month, and the reinvestment of proceeds from maturing securities) outweighed the costs, and as such, it was decided to maintain the status quo in March.

Views were split, however, about the future of the asset purchase program. Many meeting participants emphasized that any decision to scale back asset purchases should “reflect both the improvement in their overall outlook for labour market conditions…and their confidence in the sustainability of that improvement.” To that end, a few FOMC members felt that the risks and costs of purchase, combined with the improved outlook since the fall, would likely make the reduction in the pace of purchases “appropriate around midyear, with purchases ending later this year.” Several other Committee members thought that if the outlook for the labour market improved as expected, “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.” The one dissenter (Esther George) viewed that purchases should be reduced immediately. The minutes noted that the survey of primary dealers conducted before the March meeting indicated that median expectations were for asset purchases to end in the first quarter of 2014, with the pace of purchases being adjusted downwardly before ending.

An interesting bit from the Minutes relates to the Fed’s ultimate exit strategy, particularly to potential asset sales. Meeting participants expressed concerns about the adverse effect a normalization of the Fed’s balance sheet would have on the MBS market and noted that “a decision by the Committee to hold its MBS to maturity instead of selling them would essentially eliminate this risk.” Moreover, a decision not to sell MBS, or to sell only very slowly, “would also mitigate some of the financial stability risks that could be associated with such sales” while also being viewed as a “potential source of additional near-term policy accommodation.” This suggests that there is a component of the FOMC that is leaning toward not selling MBS as part of its unwinding of monetary stimulus.

The Fed’s meeting minutes indicate that policymakers are a little more upbeat on the economic outlook, albeit this predates the disappointing release of the March non-farm payroll data. We anticipate that growth in the US economy will ease in the current quarter following a bounce in the first quarter of 2013 as fiscal headwinds act as a drag on overall activity. We expect growth to reaccelerate in the second half of this year and into 2014; however, the pace of growth in unlikely to be sufficient to bring the unemployment rate below the Fed’s 6.5% threshold during this period. This supports the case for the Fed to maintain an accommodative policy stance, with the fed funds rate target to be held in its current range of 0.00% to 0.25% into 2015.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

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