U.S. Highlights of the Minutes from the July 30-31 FOMC Meeting

The Federal Open Market Committee (FOMC) members viewed the information received during the period since the June 2013 FOMC meeting as suggesting that economic activity had expanded at a modest pace. There was also the acknowledgement that “labour market conditions showed further improvement in recent months” although with the caveat that the unemployment rate remained “elevated.” Looking ahead, the minutes indicated some encouragement that gains in economic and employment growth occurred “despite tighter fiscal policy.” Looking ahead, “with global financial conditions less strained overall,” members saw “the downside risks to the outlook for the economy and the labour market as having diminished since last fall.” There was also the acknowledgement that inflation was running below target. Although this was likely due to transitory factors, the concern was expressed that the persistence of this shortfall “could pose risks to economic performance.”

In the discussion of monetary policy, all members but one (Kansas City District Fed Reserve President George) judged that the outlook warranted the continuation of both keeping the target range for the federal funds rate at 0.0% to 0.25% and maintaining asset purchases totalling $85 billion per month. The dissenting view from George was that the improvement in labour markets was sufficient to call “for a more explicit statement from the Committee that asset purchases would be reduced in the near future.” Looking ahead to policy actions beyond the July meeting, the minutes suggest a more evenly split view with respect to asset purchases. It indicated that “a few members emphasized the importance of being patient…before deciding on any changes to pace of asset purchases.” “At the same time, a few others pointed to the contingent plan that had been articulated on behalf of the Committee the previous month, and suggested that it might soon be time to slow somewhat the pace of purchases as outlined in that plan.” The minutes indicated no disagreement about maintaining the current range for fed funds of 0.00% to 0.25% percent “as long as the unemployment rate remains above 6.5% percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2% longer-run goal, and longer-term inflation expectations continue to be well anchored.”

The minutes revealed some extended discussion of the “recent shortfalls of inflation” below its 2% objective. The Committee considered adding “more information concerning the contingent outlook for asset purchases to the policy statement, but judged that doing so might prompt an unwarranted shift in market expectations regarding asset purchases.” In the end, it opted to indicate in the statement that it “reaffirmed its view”--rather than simply “expects”--that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.

Overall, the minutes clearly suggested that there are FOMC members seeing the need for the pace of asset purchases to start to be slowed. Thus, the prospect of tapering to commence sometime this fall remains a very strong possibility; however, guidance will clearly be taken from the upcoming economic data. On that front, the July payroll report, released two days after the July 30 and 31 FOMC meeting, saw a weaker than expected increase with downward revisions to the two previous months, which likely tempered that Fed’s optimism about improving labour markets. This will clearly focus attention on the August data to see if the weakening in July employment growth is reversed. As well, any reduction in asset purchases could also be contingent on inflation not moving any further away from the Fed’s 2% long-run objective.

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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