The minutes of the January 28-29 FOMC spent a lot of time on the normal housekeeping tasks at the start of the year. Most of the discussion content was already well known from Chair Jerome Powell’s January 29 press briefing and his semiannual monetary policy testimony on February 11-12. Outside of the discussion of the monetary policy framework, there was little to supplement available public comment.
The review of the monetary policy framework is not yet complete. The results are expected around mid-2020. The two points under discussion had not reached a definitive conclusion, but sounded like the FOMC was getting closer to a final form.
Critical in past discussions of a new framework was how best to convey inflation expectations. Earlier discussions about using inflation indexing to allow some sort of catch up after a period of low inflation seemed to boil down to the fact that it was difficult to explain and problems in determining when to start indexing. The discussions in the January 28-29 minutes suggest that the FOMC is starting to favor expressing inflation objectives in terms of a range of one of three types. Again, the problem seems to be one of the hazards in communication and also avoidance of harming the Fed’s credibility in establishing one after a period of low inflation and at a time when inflation is not already at the 2% symmetric objective. There were some hints that the FOMC might ultimately just stick with its present formulation. In the end, I think the decision will be to establish a range. The three types mentioned – uncertainty, operational, and indifference – seem to ultimately be distinctions without a lot of practical differences. In the end, having a range is probably a better benchmark for communicating the symmetric objective and a center point of 2% as was discussed is both familiar and consistent with past Fed policy and that from other central banks.
In the wake of the financial crisis, some Fed policymakers – notably then-Chair Ben Bernanke – spoke about how supervision and regulation were tools of monetary policy in that they helped avoid financial instability. At present, the framework discussion is looking at “the effects that alternative monetary policy strategies and tools might have on financial stability”. Financial stability was viewed as necessary to achieve the dual mandate. “Some participants remarked, however, that keeping policy rates low to achieve both of the Committee’s dual-mandate objectives may contribute to a buildup of financial vulnerabilities, especially at times when the economy is at or above full employment, a development that could pose future risks to the economy and to the ability of the Committee to achieve its dual mandate”. The upshot is that the hard data is lacking on the best way to deploy monetary policy in a time of persistent low interest rates, and on the relationship between monetary policy and financial stability. In the end, FOMC participants “generally agreed that supervisory, regulatory, and macroprudential tools should be the primary means to address financial stability risks”. This doesn’t eliminate using monetary policy to address vulnerabilities, but it does mean it will not be first line of defense.
At this time the minutes reflect conditions that were three weeks ago. Data in the intervening period have not undone the assessment that the labor market is strong and inflation low relative to target, but stable. Risks to the outlook “had diminished recently, and there were some signs of stabilization in global growth. Nonetheless, uncertainties about the outlook remained, including those posed by the outbreak of the coronavirus”. Recent reports of improvements in manufacturing suggest that global growth is indeed more stable with trade agreements with China and the passage of USMCA, while the scare associated with the coronavirus looks to be contained while it is being carefully monitored. However, there remained “ongoing challenges facing the energy and agriculture sectors”. “Geopolitical risks, especially in connection with the Middle East, remained”, the minutes said.
The minutes also noted that the FOMC gave attention to the “staff report suggesting that overall financial vulnerabilities remained moderate and that the financial system remained resilient”. “Some participants” were concerned about financial imbalances that “could amplify an adverse shock to the economy”.
In the end, current interest rate policy was deemed appropriate. “A few” participants wanted more stress on the need to get inflation back up to objective and “several participants” said that getting inflation above 2% for a time would highlight the symmetry of the inflation objective.
Discussion of a standing repo facility remained in play as the FOMC determined that purchases of Treasury bills had brought the size of reserves back to an ample level and that term- and overnight repo operations had smoothed out money market operations.
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