The Fed minutes from the Sept. 12-13 meeting, in which the Federal Open Market Committee agreed to a third round of purchases of mortgage-backed securities for an indefinite period (a policy known as "QE3"), are out, and they signal that if anything, the resulting policy was tamer than some wanted. It also suggests that you should expect the Fed to declare at its next meeting a level of unemployment we'd need to reach for them to start tightening again. Here are some highlights.
There was broad consensus on buying more assets
Most committee members believed that buying new assets could "provide support to the economic recovery by putting downward pressure on longer-term interest rates." And most also thought that buying mortgage-backed securities would be better than Treasuries. "Some participants suggested that, all else being equal, MBS purchases could be preferable because they would more directly support the housing sector…One participant, however, objected that purchases of MBS, when compared to purchases of longer-term Treasury securities, would likely result in higher interest rates for many borrowers in other sectors."
There were a few doubters, who "expressed skepticism that additional policy accommodation could help spur an economy that they saw as held back by uncertainties and a range of structural issues." Another worried that more asset buys "could lead to excessive risk-taking on the part of some investors and so undermine financial stability over time." But most participants noted that the Fed can always change the amount of assets they're buying, and so negate these costs.
But participants disagreed on tying policy to unemployment
Some, like Columbia's Michael Woodford, have criticized the Fed for not tying policy to an explicit measure of economic health, such as the level of nominal GDP or the unemployment rate. The minutes suggest these critics have allies within the Fed: "Many participants thought that more-effective forward guidance could be provided by specifying numerical thresholds for labor market and inflation indicators that would be consistent with maintaining the federal funds rate at exceptionally low levels."
They argued this would provide greater clarity about the Fed's future actions. These members likely included Chicago Fed president Charles Evans, who has argued that the Fed should keep rates low until unemployment is below 7 percent or inflation is above 3, and Minneapolis Fed president Narayana Kocherlakota, who has proposed targets of 5.5 percent and 2.25 percent, respectively.
But the members couldn't agree on what those targets should be, and "some were reluctant to specify explicit numerical thresholds out of concern that such thresholds would necessarily be too simple to fully capture the complexities of the economy and the policy process." They concluded by agreeing that thresholds were useful, but that "further work would be needed" to flesh out exactly which to use. So look out for a rule like Evans' or Kocherlakota's at the next Fed meeting.
They disagree about uncertainty
Just like economists outside the bank, FOMC members disagreed about whether uncertainty regarding government policies, Europe, and other factors is slowing down the economy. "Many participants…noted that a high level of uncertainty regarding the European fiscal and banking crisis and the outlook for U.S. fiscal and regulatory policies was weighing on confidence, thereby restraining household and business spending. however, others questioned the role of uncertainty as a factor constraining aggregate demand."
They disagree about what's keeping unemployment high
While the best economic evidence suggests that unemployment is high because people aren't spending money, not because workers don't have the right skills, many on the FOMC seem to disagree:
"A few participants reiterated their view that the persistently high level of unemployment reflected the effect of structural factors, including mismatches across and within sectors between the skills of the unemployed and those demanded in sectors in which jobs were currently available. It was also suggested that there was an ongoing process of polarization in the labor market, with the share of job opportunities in middle-skill occupations continuing to decline while the shares of low and high skill occupations increased. Both of these views would suggest a lower level of potential output and thus reduced scope for combating unemployment with additional monetary policy stimulus."
There is some evidence for the polarization hypothesis, but the rest seems just wrong. Other discussion participants disputed the structural account, and noted that worse structural problems could arise if people remain unemployed and can't keep up with employed workers in terms of skills:
Several participants, while acknowledging some evidence of structural changes in the labor market, stated again that weak aggregate demand was the principal reason for the high unemployment rate. They saw slack in resource utilization as remaining wide, indicating an important role for additional policy accommodation. Several participants noted the risk that continued high levels of unemployment, even if initially cyclical, might ultimately induce adverse strucutral changes.
In particular, they expressed concerns about the risk that the exceptionally high level of long-term unemployment and the depressed level of labor participation could ultimately lead to permanent negative effects on the skills and prospects of those without jobs, thereby reducing the longer-run normal level of employment and potential output.
Translation: if we don't fix unemployment now, we're going to have fewer jobs and weaker growth for decades to come.
Most people weren't worried about inflation
Participants largely agreed that inflation wouldn't go above the 2 percent target the Fed has set: "With longer-term inflation expectations stable and the unemployment rate elevated, participants generally anticipated that inflation over the medium run would likely run at or below the 2 percent rate that the Committee judges to be most consistent with its mandate."
But a few participants worried that extended loose policy from the Fed could change that: "A few participants felt that maintaining a highly accommodative stance of monetary policy over an extended period…posed upside risks to inflation. Other participants, by contrast, saw inflation risks as tilted to the downside, given their expectations for sizable and persistent resource slack."
Everyone's worried about the fiscal cliff
FOMC members generally agreed that if we go over the "fiscal cliff" come year's end, with big tax increases and budget cuts set to take effect, the results would be harmful to the economy: "Participants generally expected that fiscal policy would continue to be a drag on economic activity over coming quarters…Participants…noted that if an agreement was not reached to tackle the existing tax cuts and scheduled spending reductions, a sharp consolidation of fiscal policy would take place at the beginning of 2013."