U.S. Highlights of the Minutes from the June 18 and 19 FOMC Meeting


 
Location: Toronto
Date: 2013-07-11

Federal Open Market Committee (FOMC) members viewed the information received during the period since the May 2013 FOMC meeting as suggesting that economy activity had expanded at a moderate pace. A number of meeting participants mentioned that they were encouraged by the “apparent resilience of private spending” despite the headwinds from fiscal consolidation measures introduced earlier in the year. As well, labour market conditions were noted to have shown further improvement, although the unemployment rate remained elevated. These developments, combined with reduced strain in global financial conditions, led members to view that downside risks to the outlook generally as “having diminished since the fall.” Transitory influences (including a one-time reduction in Medicare costs) were contributing to inflation running below the FOMC’s long-run objective, but inflation expectations remained stable, and the Committee anticipated that inflation would move closer to the 2% objective in the medium term.

In the discussion of monetary policy, all members but one (Kansas City Fed chief George) judged that the outlook warranted the continuation of the Fed’s current highly accommodative policy stance (dissenter George viewed the current outlook as warranting a deliberate statement that asset purchases would be reduced in the very near future). In terms of the outlook for policy, “many members indicated that further improvement in the outlook for the labour market would be required before it would be appropriate to slow the pace of asset purchases.” Moreover, given that forecasts of a sustained pickup in growth had not been realized in recent years, “some” added that they would need more evidence that the projected acceleration in economic activity would occur before reducing the pace of asset purchases. One member noted that the decision to begin tapering asset purchases would “depend importantly” on evidence of inflation moving toward the FOMC’s 2% objective, and a couple of other members also voiced concern that the downside risks to inflation had increased, with one suggesting that this risk be explicitly included in the statement. “Several” members judged that a reduction in asset purchases would soon be warranted given recent labour market developments. Two members called for such action “relatively soon” in order to prevent the potential negative consequences of the program exceeding its benefits, although another member pointed out that if tapering were to begin for this reason, then the FOMC would need to explore other options for providing the appropriate monetary accommodation to the economy.

Meeting participants generally agreed that the Committee should provide additional clarity about its asset purchase program relatively soon, with most participants thinking that the Chairman should describe a likely path for asset purchases in the coming quarters that was conditional on economic outcomes consistent with the FOMC’s expectations in his post-meeting press conference. The Chairman would also take this opportunity to draw the distinction between the asset purchase program and the forward guidance regarding the fed funds target, emphasizing that the FOMC anticipates that there will be “considerable time” between the end of asset purchases and when it becomes appropriate to increase the fed funds target.

Overall, the Minutes suggest that the bulk of the Committee members viewed tapering is warranted in the coming months in line with the plan laid out by Bernanke in his post-meeting press conference that the pace of securities purchases will moderated “later this year” and that the pace would be reduced in “measured steps” thereafter. This is consistent with our own view that the Fed will start to scale back its asset purchases in September or October with the program winding up by the middle of 2014. We then expect that the Fed will move slowly in terms of raising the fed funds rate target, with the first hike not expected until mid-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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