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Comment: Minutes of June 9-10 FOMC minutes show Committee thinking about communications and policy tools

As of three weeks ago and still very much the case based on more recent comments from Chair Jerome Powell and other FOMC participants. The minutes of the June 9-10 meeting highlighted:

    ~The Fed views the challenges of navigating the COVID-19 as a public health crisis akin to a natural disaster and is deeply concerned about the lopsided impact on those least able to recover from the economic disruptions. Policymakers are worried about getting people back to work to ensure that lengthy separation from the workforce does not lead to erosion of skills and a connection with the job market.
    ~Steps take so far to address the initial impact of widespread shutdowns in the US economy and mitigate the effects are broadly seen as having served their purpose – both from fiscal and monetary policy. However, “Participants judged that the effects of the coronavirus outbreak and the ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term and would pose considerable risks to the economic outlook over the medium term.” Risks to businesses “remained high” in spite of some “halting improvements” in economic activity. “Nevertheless, participants concluded that voluntary social distancing and structural shifts stemming from the pandemic would likely mean that some proportion of businesses would close permanently.”
    ~The labor market had seen “surprisingly positive new” in the May employment data, but “nearly 20 million jobs had been lost, on net, since February.” “[F]urther substantial improvement in the labor market were seen as depending on a sustained reopening of the economy.” Data in recent weeks suggest that this may not come to pass, or at least only partially as some jurisdictions are forced to reimpose social distancing rules, especially just before the long July 4 weekend.
    ~Monetary policy was deemed “appropriate” at the time. The fed funds target rate is likely to remain at the effective lower bound (ELB) for the foreseeable future, i.e. at least through 2021 in the Summary of Economic Projections and probably into 2022. Policymakers generally agreed that keeping rates near the ELB will be necessary to ensure an economic recovery with any heft.
    ~For now at least, policymakers are going to stick to using interest rates, forward guidance, and asset purchases as the primary tools of monetary policy.
    ~Forward guidance may get a tweak to include outcome-based goals such as a particular unemployment rate, or be calendar-based through a particular timeframe. The FOMC has used both in the past with varying degrees of success as a tool of communicating policy to the public. However, these early usages were unfamiliar and that contributed to misunderstandings about the nature of the guidance provided. That should not be the case now that more experience with forward guidance is in place.

For a history of the formulation of forward guidance statements, please see the Whetstone Analysis Reference Library.

    ~The flood of asset purchases as slowed considerably as the need to provide large amounts of liquidity has ebbed. The present level of about $4 billion a month in Treasurys and $4.5 in Agency MBS seems about right at the moment. It will be adjusted, if needed.
    ~There was a discussion of the use of yield caps or targets to control government bond yields. Unlike some unconventional monetary policy tools, this one has sufficient history in the US and at other central banks that the Fed can assess its utility. The FOMC is not ready to deploy it and may not need to, but if it does, it appears to be leaning toward the route recently taken by the Reserve Bank of Australia as most consistent with the current situation and needs. Policymakers are weighing there risks, including that “monetary policy goals might come in conflict with public debt management goals, which could pose risks to the independence of the central bank.”
    ~The need to complete the review of the monetary policy framework was mentioned as an important adjunct to better communicating how the Fed can achieve the dual mandate of maximum employment and price stability. It should include an update to the Statement on Longer-Run Goals and Monetary Policy Strategy.
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