The Federal Reserve released the minutes of its January policy meeting this afternoon, and we’ve scoured it for the juiciest bits. If we learned one thing, it's that January was a weird month. From the emerging market turmoil to the polar vortex, the economy was assailed by unexpected forces. It was also a time of transition, as former Fed chairman Bernanke handed over the reins of the central bank to his second-in-command, Janet Yellen, and several of the Fed's most vocal officials rotated onto its policy-setting committee.
In other words, when it comes to parsing the January minutes, remember that past performance is not necessarily indicative of future results. The full text of the minutes are here. Or just scan our five top takeaways:
1. The taper worked!
The Fed began scaling back its massive stimulus program in December, reducing its monthly bond purchases from $85 billion to $75 billion. The moment was a critical test of both the Fed's ability to begin to distance itself from the aggressive steps it has taken to support the economy and the markets' ability to stomach that shift. The Fed reviewed the fallout at its January meeting and seemed to judge the taper a success:
While investors were somewhat surprised by the FOMC’s decision at its December meeting to reduce the pace of its asset purchases, the policy action and associated communications appeared to have only a limited effect on market participants’ outlook for the Federal Reserve’s balance sheet. Indeed, the Committee’s decision to cut the pace of purchases and its ra- tionale for doing so seemed to increase investors’ con- fidence in the economic outlook, a shift that was fur- ther supported by subsequent U.S. economic data releases. ...
In discussing financial developments over the intermeeting period, several participants noted that the Committee’s December decision to make a modest reduction in the monthly pace of asset purchases had not resulted in an adverse market reaction. Several participants observed that current market expectations for asset purchases and the future course of the federal funds rate were reasonably well aligned with participants’ own expectations of the path for policy.
2. But tapering (or pausing) the taper is not off the table ...
The Fed was confident enough in the economic outlook to continue reducing its stimulus by another $10 billion during its January meeting. But unexpectedly weak job growth in December coupled with persistently low inflation led a few Fed officials to at least raise the question of whether the taper should continue.
A couple of participants observed that continued low readings on infla-tion and considerable slack in the labor market raised questions about the desirability of reducing the pace of purchases; these participants judged, however, that a pause in the reduction of purchases was not justified at this stage, especially in light of the strength of the economy in the second half of 2013.
Several participants argued that, in the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor of continuing to reduce the pace of purchases by a total of $10 billion at each FOMC meeting. That said, a number of participants noted that if the economy deviated substantially from its expected path, the Committee should be prepared to respond with an appropriate adjustment to the trajectory of its purchases.
Let us be clear: The Fed voted unanimously to continue reducing its bond-buying program. And Fed Chair Janet Yellen said last week that slowing down the pace of reductions would require a "notable change" in the economic outlook. But the minutes show the possibility is on the table -- possibly even more so now considering the disappointing data since the meeting. (We'll get to that more later)
3. There's a raging debate over what's behind the shrinking workforce
Fed officials are divided over how to read the decline in the unemployment rate. Some economists believe the drop is misleading because it's been driven in large part by people giving up hope of finding a job and leaving the workforce. Others say it's largely a demographic issue, as young people stay in school longer and baby boomers hit retirement age. The answer is critically important for monetary policy. A high number of discouraged workers means there's still plenty of slack in the labor force -- and the Fed can try to combat that through continued easy-money policies. But if demographic factors are the issue, then it may soon be time for the Fed to let off the gas.
Participants continued to debate the reliability of the unemployment rate as an indicator of overall labor market conditions, taking into account the further decline in labor force participation in recent quarters, still-elevated levels of underemployment and long-term unemployment, and the ap-parent absence of wage pressures. Much of the down- ward trend in the labor force participation rate since the start of the recession was seen as the result of shifts in the demographic composition of the workforce and the retirement of older workers; the extent of the cyclical portion of the decline was viewed by some as diffi- cult to gauge at present. A few participants judged that the decline in participation for younger and prime-age workers likely reflected the slow recovery in jobs and wages and so might be reversed as labor market condi- tions strengthened. In addition, several others pointed out that broader concepts of the unemployment rate, such as those that include nonparticipants who report that they want a job and those working part time who want full-time work, remained well above the official unemployment rate, suggesting that considerable labor market slack remained despite the reduction in the un- employment rate. A few participants noted worker shortages in specific regions and occupations, with one District reporting widespread shortages of skilled labor leading to emerging labor cost pressures. However, a number of participants saw the low rates of increase in most measures of wages as consistent with continued labor market slack.
4. Guidance on forward guidance
The Fed is still not sure how to alter its guidance around when it will consider raising its benchmark short-term interest rate from near zero. Officials floated a range of options that primarily centered around doing away with the current 6.5 percent threshold in favor of broader measures of the health of the labor market. There was also a new push to add concerns about financial stability as a factor in forward guidance.
The Fed could alter its guidance as soon as its meeting next month, especially if the unemployment rate actually crosses its line in the sand.
Some participants favored quantitative guidance along the lines of the existing thresholds, while others preferred a qualitative approach that would provide additional information regarding the factors that would guide the Committee’s policy decisions. Several participants sug- gested that risks to financial stability should appear more explicitly in the list of factors that would guide decisions about the federal funds rate once the unem- ployment rate threshold is crossed, and several participants argued that the forward guidance should give greater emphasis to the Committee’s willingness to keep rates low if inflation were to remain persistently below the Committee’s 2 percent longer-run objective. Additional proposals included relying to a greater extent on the Summary of Economic Projections
5. The backdrop has changed
A lot has happened in the three weeks since the Fed held its meeting. Back then, investors were worried about the possibility of financial contagion amid a global selloff that started in emerging markets and threatened Wall Street’s record-breaking rally. Now, it’s the U.S. economy that analysts are worried will disappoint. Forecasters had promised that 2014 would be the breakaway year, but so far it’s stumbling out of the gate. The Labor Department reported tepid job growth in January and said December’s even weaker numbers not a miscalculation. Retail sales also came in low, suggesting that the strong consumer spending that buoyed growth last year is petering out.
To be sure, the Fed doesn’t make snap decisions based on just a month or two of data. But the numbers are piling up on the downside, and that makes the debate that policymakers had in January feel like it’s already out of date.
Also, keep in mind that the Fed’s 12-member policy committee is working on a shoestring these days. There were two vacant seats at January’s meeting: Gov. Elizabeth Duke stepped down last summer, while Gov. Sarah Bloom Raskin is abstaining as she awaits confirmation to become the new deputy secretary at Treasury. President Obama has nominated two replacements -- Stanley Fischer, the former head of the Bank of Israel, and Lael Brainard, a top official at Treasury -- but they have yet to be confirmed. The meeting was also the last for Bernanke after eight years in office, and Cleveland Fed President Sandra Pianalto will step down this summer, to be replaced by Loretta Mester.
Got all that? The upshot is essentially that the committee that met in January will look very different in just a few months -- another reason to read the minutes with a grain of salt.