U.S. Highlights of the Minutes from the April 30 and May 1 FOMC Meeting


 
Author: RBC Financial Group Economics Department
Location: Toronto
Date: 2013-05-23

The Minutes of the April 30 and May 1, 2013 Federal Open Market Committee (FOMC) meeting provide the details of the discussion surrounding the Committee’s decision to make no changes to its monetary policy stance.

Committee members viewed the information received during the period since the March FOMC meeting as suggesting that the economy was expanding at a moderate pace “despite some softness in recent economic data.” Participants viewed the outlook as little changed since March, with growth expected to “proceed at a moderate pace and result in a gradual decline in the unemployment rate” toward levels consistent with the Fed’s dual mandate. With that said, recent data raised some concern that the recovery may be slowing after a solid start to 2013, “thereby repeating the pattern observed in recent years.” A “number” of participants noted that risks to the outlook remain skewed to the downside, although a “couple” of participants suggested that such risks have diminished significantly since last fall. A “few” participants warned that economic data could remain soft “for the next few months” regardless of the underlying strength of the US economy due to the ongoing fiscal restraint and a weak global outlook.

The discussion of monetary policy focused on the conditions under which it may be appropriate to change the pace of asset purchases. While most meeting participants agreed that labour market conditions have shown progress since the current asset purchases program was started in September, “many” indicated that “continued progress, more confidence in the outlook, or diminished risks” would be required before slowing the pace of purchases would become appropriate. A “number” of participants expressed a willingness to begin tapering asset purchases as early as June if economic data received by that time “showed evidence of sufficiently strong and sustained growth”, although views differed on what evidence would specifically be necessary as well as the likelihood of that outcome. As well, one participant preferred to “begin decreasing the rate of purchases immediately”, while another expressed a preference to increase the level of monetary accommodation at the meeting. Recall that the minutes from the March meeting indicated that a “few” participants viewed that it would likely be appropriate to scale back purchases “around mid-year”, “several others” thought that it would be appropriate to slow purchases “later in the year and to stop them by year-end”, two wanted to continue purchases at the current pace “through the end of the year”, and one wanted an immediate reduction in purchases. In terms of the composition of asset purchases, one participant expressed the view that given the substantial improvement in housing market activity and in an effort to avoid further “credit allocation across sectors of the economy”, the FOMC should start to shift any purchases toward Treasuries and away from mortgage-backed securities (MBS).

In terms of the statement, the addition of the comment that the FOMC “is prepared to increase or reduce the pace of its purchases” to the May policy statement stemmed from the Committee’s view that it needed to communicate clearly that the pace and ultimate size of the asset purchase program was dependent on the FOMC’s continued assessment of the outlook as well as its views on the effectiveness and costs of further asset purchases.

The Fed’s meeting minutes did not shed much light on the Fed’s plans regarding the timing of the end of its current open-ended asset purchase program. Given the concerns and uncertainty about how quickly the US economy reaccelerates, we expect that the Fed will maintain the current pace of security purchases during the summer and into the fall. As economic momentum becomes more firmly established in the second half of 2013, we anticipate that the Fed will begin tapering its purchases toward the end of this year followed by a cessation of purchases in 2014. Growth in this year and next, however, is 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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