As far as insights for the interest rate outlook, the minutes of the October 29-30 FOMC meeting did not have much new to offer. There was a lot of discussion about the monetary policy framework review without any conclusions except one. While it cannot be said that the FOMC has completely removed negative interest rates from its toolbox, it is definitely buried deep. Thh FOMC also seems one step closer to establishing a standing repo facility.
The main points in the minutes seemed to be:
- For interest rate policy, most policymakers viewed the risks to the outlook as improved, but still elevated. It was the same set of challenges that have defined the FOMC’s decisionmaking for quite some time. Developments in trade policy and sluggish global growth topped the list.
- The labor market continued to be characterized as strong with inflation and inflation expectations tame, and the US economy continuing its resilience in the face of headwinds from trade. In the context of the dual mandate, reasons for providing accommodation were more in terms of risk management than actual economic data. The minutes said, “most participants judged that the stance of policy, after a 25 basis point reduction at this meeting, would be well calibrated to support the outlook of moderate growth, a strong labor market, and inflation near the Committee’s symmetric 2 percent objective and likely would remain so as long as incoming information about the economy did not result in a material reassessment of the economic outlook.”
- A pause in reducing rates was deemed appropriate by the consensus. “Many participates” felt that low inflation and low inflation expectations justified another rate cut at the meeting. “Some participants” wanted no change in rates with “already adequate” accommodation and “in light of lags in the transmission of monetary policy” felt it was a good time to step back as assess previous cuts. “A few participants” felt that another cut would be a sound preemptive step to provide support well before short-term rates were set near the ELB in the event of a downturn.
- In any case, while there were significant distances among policymakers along the dove-moderate-hawk spectrum, it seemed that these were less so than previously. It may be that there will be less dissent in the coming months about the appropriate stance of interest rate policy. The three cuts in 2019 – no more are expected absent a shock – are turning out to be a more of mid-cycle adjustment along the lines first spoken of by Chair Powell back in July than a full-out easing cycle.
- Balance sheet policy was discussed in terms of ensure the Fed’s holdings are appropriate to administer rates in a large reserve environment. The FOMC the purchase of Treasury bills is ongoing and the New York Fed has been instructed to hold overnight and term open market operations to ensure that there is no repeat of the crunch in mid-September.
- The FOMC has previously said it will consider a standing repo facility as part of an ample supply of reserves monetary policy regime. No decision was made at this meeting. Two approaches are under consideration. The minutes said, “Under the first approach, the Desk would conduct modestly sized, relatively frequent repo operations designed to provide a high degree of readiness should the need for larger operations arise; under the second approach, the FOMC would establish a standing fixed-rate facility that could serve as an automatic money market stabilizer.” My sense is that the FOMC prefers the latter over the former mainly because it provides greater control of the federal funds rate.
- There was another extensive discussion of the review of the monetary policy framework. This time the bulk of the discussion was on forward guidance and balance sheet policy tools. There was discussion about negative interest rates, but this tool seems to have been largely dismissed, or at least buried deep in the toolbox. The minutes said, “The briefing also discussed negative interest rates, a policy option implemented by several foreign central banks. The staff noted that although the evidence so far suggested that this tool had provided accommodation in jurisdictions where it had been employed, there were also indications of possible adverse side effects. Moreover, differences between the U.S. financial system and the financial systems of those jurisdictions suggested that the foreign experience may not provide a useful guide in assessing whether negative rates would be effective in the United States.” All FOMC participants agreed.
- In the minutes of the September 17-18 FOMC meeting, the discussion mentioned using forward guidance and asset purchases sooner and more aggressively. In the October 29-30 review, it was what form forward guidance would take with three options – qualitative, date-based, and outcome-based – and the best way to maximize the impact of asset purchase programs – flow-based with economic targets or open-ended. No decisions were reached.
- A new possible tool was discussed in the form of using the balance sheet to cap rates on short- or long-maturity Treasury securities through open market operations. This might mean smaller sizes of asset purchases would be needed to provide similar accommodation to earlier asset purchase program.
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