Fed leaders knew they were blowing it at their last meeting, and other tidbits from the FOMC minutes

July 10, 2013

FOMC minutes are here! FOMC minutes are here! (Joshua Roberts - BLOOMBERG)

The Federal Reserve released minutes of its June 18-19 meeting Wednesday afternoon. You may remember the meeting itself as a humdinger. There was no substantive policy change, but the reaction to Chairman Ben Bernanke's press conference afterward, where he discussed the Fed's likely pathway toward ending its program of quantitative easing, prompted a huge global selloff of stock and bond markets (and a week of Fed officials trying to walk back any perception that the Fed will be raising interest rates anytime soon).

So, what do the minutes tell us that we didn't already know? Here are some things that stand out.

Some of the committee members really don't want to be talking about exit strategy right now. The selloff happened in part because markets interpreted any talk of ending the Fed's QE policies as signaling that the end might be imminent. It's clear that some officials at the central bank were worried about exactly that. The Federal Open Market Committee, for example, began its meeting with a discussion of the longer-range plan for exiting from an era of easy money. And, the minutes note, "although most participants saw this review as prudent longer-range planning, some felt that the discussion was premature." Those members, whoever they are, look prescient: The talk of exit strategy was indeed taken by the markets to mean an exit would come sooner. After the meeting, market expectations of when the Fed will raise interest rates shifted to earlier.

No, really, some were warning of exactly what happened after the meeting. Some Fed leaders had become more confident that the job market improvement would stick and saw a need to clearly communicate plans to wind down the pace of bond purchases. To others, this approach "appeared likely to limit the Committee's flexibility" in adjusting to data as it comes in. But a third group was more farsighted. "Others were concerned that stating an intention to slow the pace of asset purchases, even if the intention were conditional on the economy developing about in line with the Committee's expectations, might be misinterpreted as signaling an end to the addition of policy accommodation or even be seen as the initial step toward exit from the committee's highly accomodative policy stance." Ding ding ding. That group got the market reaction on the nose -- but they lost the internal debate over how much to open up on the Fed's tapering plans.

Housing, stocks and oil help growth; higher rates and a stronger dollar hurt. The Fed staff's economics projections were a story of offsetting impacts. On the positive side, "the staff raised its projected paths for equity and home prices . . . and boosted its outlook for domestic oil production." But all wasn't light and roses. "These positive factors were partly offset in the staff's medium-term GDP projection by higher projected paths for both longer-term interest rates and the foreign exchange value of the dollar.

Health care and other regulations may be affecting business spending. Or at least that's what Federal Reserve leaders are hearing as they canvass businesspeople before gathering in Washington. "Uncertainties about regulatory issues and fiscal policies as well as weak economic activity abroad were cited as factors weighing on business decisionmaking. Some businesses, particularly smaller firms, were again reported to be concerned about the implications of new health-care regulations for their labor costs."

Fed officials really are all over the place. See if you can count all the different permutations of the different views of the different (unnamed) officials. "Many members" indicated further improvement in job market needed before slowing bond purchases. "Some added" they would need to see acceleration in the economy before tapering bond purchases. "For one member," that decision would depend on evidence that inflation was rising toward the Fed's 2 percent target (this is almost certainly James Bullard of the St. Louis Fed). "A couple of other members" also worried about inflation being too low. "Several members" judged that reducing asset purchases would soon be warranted. "Two of these members" also indicated that the Fed needs to watch out for negative consequences of QE. "Another member" pointed out that if the program were ended because of bubble worries, the Fed should explore other options to ease policy. "Many members" indicated that asset purchases are separate from their short-term interest rates.

Whew. No wonder Fed officials' speeches on these things often sound like a cacophony. That's even more true if you get them all in the same room.

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