The Federal Open Market Committee Meeting in April was completely overshadowed by the first post-meeting presser by Fed Chair Ben Bernanke. Of course, it didn't help that the meeting statement revealed absolutely nothing new. But today, the FOMC released its meeting minutes. They show some pretty interesting discussion surrounding the Fed's exit strategy.
Much of the first section of the minutes focused on how to "normalize" monetary policy. It explained what the governors are thinking in terms of exit execution, though it provided little insight on the timing. In fact, it explicitly said:
Participants noted that the Committee's decision to discuss the appropriate strategy for normalizing the stance of policy at the current meeting did not mean that the move toward such normalization would necessarily begin soon.
So this is just planning for a future date, not tomorrow. Though, it does presumably indicate that exit is on the Fed's mind. That might be in large part to assure the market that it shouldn't worry about inflation, because the Fed really does have a plan to avoid it. There are a few interesting statements made in the minutes about how the Fed will proceed once exit begins:
- The Fed will reduce its asset holdings over the intermediate term to something more in line with normal activity, so that the federal funds rate can again become its chief monetary policy tool.
- The Fed intends to get rid of all of the securities on its balance sheet that aren't Treasuries to move it back to historical norms, again in the intermediate term.
- In order to restore the Fed's balance sheet assets to consist of Treasuries, agency (mortgage) securities will eventually have to be sold. That is to say that relying on the assets' maturity alone won't be adequate -- it won't come fast enough.
- A clear public communication framework must be put in place to conduct these asset sales, but probably one which would also provide the Fed some flexibility.
- The first step in its exit strategy would be to stop reinvesting maturing assets and just allowing them to runoff naturally.
- The second (or a concurrent) step would be to change the language in forward policy guidance, which presumably means to stop saying that rates will be exceptionally low "for an extended period."
- We'll probably see interest rates move before asset sales begin, however, as a majority of FOMC participants favor that approach. This implies that asset sales are likely quite a ways off. (sometime beyond "an extended period")
- It may take at least five years, once sales begin, to restore the Fed's balance sheet to a size nearer to historical norms. So these sales will be very gradual once started.
Usually the minutes provide some excitement once per quarter when new economic projections are released. In April, however, they were released with the meeting statement, since Bernanke's presser was meant to discuss them.
As stated at that time, the Fed governors and presidents were a little more pessimistic about GDP growth in the shorter-term than they were in January. The range of growth rate projections for 2011 and 2012 ticked down by between 0.1% and 0.5%, depending on which committee member you ask. Meanwhile, unemployment expectations generally improved a bit. Finally higher inflation expectations were reported. See below for charts that document these changes.
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