The Fed isn’t very bullish on ’13, and five other takeaways from the new minutes

January 3, 2013

The  Federal Reserve released minutes of its Dec. 12 policy meeting Thursday afternoon, offering a window into how leaders of the central bank viewed the economy and monetary policy at the end of the year. This was the meeting, you’ll recall, where the Fed said it expects to keep easy money policies in place until either unemployment declines to 6.5 percent or inflation is forecast to rise above 2.5 percent. Here are the key points from that Federal Open Market Committee meeting:

Fed officials weren’t very bullish on 2013. “Many participants thought the pace of economic expansion would remain moderate in 2013,” the minutes say, “before picking up gradually in 2014 and 2015.” That fits with their formal economic projections, in which the consensus prediction was for growth in the 2.3 percent to 3 percent range this year.


New Fed minutes show how Bernanke & Co. were thinking about the economy three weeks ago.

And they were seriously worried about the fiscal cliff.  Fed officials, the minutes said, thought it likely that lawmakers would avert the full force of tax increases and spending cuts that had been scheduled to hit the country on Jan. 1, but “almost all indicated that heightened uncertainty about fiscal policy was probably affecting economic activity adversely,” and that “it likely had reduced household and business confidence and led firms to defer hiring and investment spending.” A few were even more negative, and “pointed out that an extended breakdown of negotiations could have significant adverse effects on economic growth."

They really don’t want the thresholds to be thought of as automatic triggers. One big objection to the policy of announcing specific unemployment and inflation thresholds that would trigger tightening was that people might view the Fed as being on autopilot,  responding automatically to two numbers. But the new minutes say that “the thresholds would not be followed mechanically and that a variety of indicators of labor market conditions and inflation pressures, as well as financial developments, would be taken into account in setting policy.”

A divide over how long QE will last. The Fed elected to continue its purchases of $85 billion in bonds every month, known as quantitative easing, to try to push down already super low interest rates and pump money into the ailing economy. But there was disagreement among committee members over how long those purchases should last. “A few members” argued that the policy would likely be needed through 2013, while “several others” thought it would make sense to slow or stop the purchases “well before” the end of the year.

Treasuries vs. MBS. The officials debated whether their program of buying securities using newly created money would be most effective if the monthly purchases were Treasury bonds or mortgage-backed securities issued by the likes of Fannie Mae and Freddie Mac. The crux of the debate was that it depends on how much Fed purchases of Treasuries would trigger of greater private-sector demand for other types of bonds, and thus lower interest rates across the economy. The Fed’s actual strategy is to buy some of each, but the minutes make clear that some on the FOMC think it would be more effective to focus on MBS to try to help the housing market.

Some intermingling of monetary policy and financial regulation. In the past, the Fed’s responsibilities for managing the nation’s money supply and its oversight over banks and other financial institutions have been almost completely separate channels of power. There was a small hint in the new minutes that those lines are breaking down some, perhaps reflecting Chairman Ben S. Bernanke’s emphasis on so-called macroprudential regulation. In discussing the potential risks to the nation's financial stability of emerging from a long period of low interest rates, one participant suggested that the Fed look back at similar episodes in U.S. history, and another commented that reforming money market mutual funds could help reduce risk in the financial system. Those types of actions were rarely discussed around the table at the FOMC in years’ past.

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Brad Plumer | January 3, 2013