The Federal Reserve released the minutes of its June policy-setting meeting on Wednesday afternoon. The documents show officials are making headway in nailing down the steps for unwinding the central bank’s unprecedented support for the U.S. economy.
Here's what we learned about the exit:
The taper will likely end with a $15 billion reduction in October.
“Some committee members had been asked by members of the public whether, if tapering in the pace of purchases continues as expected, the final reduction would come in a single $15 billion per month reduction or in a $10 billion reduction followed by a $5 billion reduction. Most participants views this as a technical issue with no substantive macroeconomic consequences and no consequences for the eventual decision about the timing of the first increase in the federal funds rate ... It would be appropriate to complete asset purchases with a $15 billion reduction in the pace of purchases in order to avoid having the small, remaining level of purchases receive undue focus among investors. If the economy progresses about as the Committee expects … this final reduction would occur following the October meeting."
Reinvestments will likely end after liftoff, in part to avoid communications complications.
“[M]aking a change to the Committee’s reinvestment policy prior to the liftoff of the federal funds rate, at the time of liftoff, or sometime thereafter would be expected to have only limited implications for macroeconomic outcomes, the Committee’s statutory objectives, or remittances to Treasury. May participants agreed that ending reinvestments at or after the time of liftoff would be best, with most of these participants preferring to end them after liftoff.”
But reinvestments still might be wound down gradually.
“A number of participants thought that it might be best to follow a graduated approach with respect to winding down reinvestments or to manage reinvestments in a manner that would smooth the decline in the balance sheet.”
The interest paid on the excess reserves that banks hold at the Fed and the new overnight reverse repo facility will provide the bounds for interest rates once tightening begins.
“Most participants agreed that adjustments in the rate of interest on excess reserves (IOER) should play a central role during the normalization process. … [A]n ON RRP (overnight reverse repo) facility with an interest rate set below the IOER rate could play a useful supporting role by helpign to firm the floor under money market interest rates.
The appropriate size of the spread between the IOER and the ON RRP was discussed, with many participants judging that a relatively wide spread -- perhaps near or above the current level of 20 basis points -- would support trading in the federal funds market and provide adequate control over market interest rates.”
But the fed funds rate would still provide the framework for monetary policy.
“Most participants thought that the federal funds rate should continue to play a role in the Committee’s operating framework and communications during normalization, with many of them indicating a preference for continuing to announce a target range.”
Officials still have concerns about reverse repos and potential distortions they could cause in the market.
“Most participants expressed concerns that in times of financial stress, the facility’s counterparties could shift investments toward the facility and away from financial and nonfinancial corporations, possibly causing disruptions in funding that could magnify the stress. … Several participants emphasized that … they did not anticipate that such a facility would be a permanent part of the Committee’s longer-run operating framework.”