Some officials of the Federal Reserve shared a common sentiment at the last policy meeting, wherein they felt that they could begin “tapering” the central bank’s large-scale quantitative easing program, commonly known as “QE3”or economic stimulus. Tapering, however, would still be contingent on positive economic growth in the United States.
Minutes of the October 29 to 30 Fed policy meeting were released earlier this week, and other takeaways included officials deciding on how they should delineate asset buying and forward guidance for interest rates, as well as how they may ideally improve rate guidance once the stimulus starts getting tapered. Some Fed officials believed that lowering unemployment rate thresholds contingent on stimulus tapering would be a good idea, but the suggestion was seemingly overruled by other officials who believed that lowering the threshold would result in a credibility gap.
“Many members stressed the data-dependent nature of the current asset-purchase program,” the Fed said in the Minutes of the late October meeting. “Some pointed out that, if economic conditions warranted, the Committee could decide to slow the pace of purchases at one of its next few meetings.” The next policy meeting will take place from December 17 to 18.
The stock market and crude oil prices both ticked downwards upon the release of the Minutes, while treasury yields had conversely gone up. Economists believe that the tenor of the October meeting was indicative of a paradigm shift, moving from bond purchases to forward guidance, pursuant to managing expectations of higher interest rates.
According to Barclays economist Peter Newland, the Fed Minutes “added to the sense that Fed policymakers are laying the groundwork for relying more heavily on forward guidance and less on asset purchases as the main tool of policy.” Experts still believe that the Fed will start tapering its stimulus early in 2014, as Fed officials had voted to continue making its bond purchases to the tune of $85 billion per month.
Fed policy has ensured that interest rates remain near zero since the latter part of 2008, while the central bank’s balance has increased four-fold to $3.9 trillion, as a result of the three rounds of quantitative easing. The Fed had committed to maintaining this policy until unemployment rates go down to 6.5 percent, with the additional contingency that inflation rates remain below 2.5 percent.
However, Fed Chairman Ben S. Bernanke said that the Fed would likely be dovish when it comes to increasing rates, as the unemployment rate in the U.S. was at 7.3 percent last month. He had also said on Tuesday that the Fed could continue ultra-easy policy until “well after” jobless rates go under the 6.5 percent threshold.
In addition to the Fed’s October 29-30 meeting, officials had also convened for an unscheduled video conference on October 16, in order to mull contingency plans in the event of an extended U.S. government stalemate. In that conference, officials considered citing the 16-day shutdown on the Fed’s October statement as a reason for economic conditions being harder to ascertain.
However, the Fed eventually decided against this, as it would have been indicative of the central bank being overly centered on policy.