Federal Reserve officials offered few additional clues to investors on the implementation of the central bank’s new monetary policy guidance, saying it was not an “unconditional commitment” to keeping interest rates low regardless of economic conditions.
At last month’s FOMC meeting, the US central bank said it would not increase interest rates until the economy had reached full employment, and inflation had reached 2 per cent and was on track to exceed that target for some time.
That solidified its resolve to keeping rates at their current level of close to zero for years to come, reinforcing its dovishness. But investors have been grasping for more details, since the central bank was deliberately vague on how it would interpret the new macroeconomic milestones it was setting — and the minutes did little to change that.
According to the readout published on Wednesday, Fed officials said the timeline for such a move would depend on how quickly or slowly the economy recovered from the coronavirus pandemic.
If the outlook was weaker, the expectation would be that interest rates would remain close to zero “for a longer period”, while “a shorter period at the current setting” would come with a stronger outlook, they said. The Fed also suggested its guidance could change if there were other big economic or financial shifts, such as the emergence of asset bubbles.
“Circumstances could arise in which the committee judged that it would be appropriate to change its guidance, particularly if risks emerged that could impede the attainment of its economic objectives,” they added.
Stephen Stanley, chief economist at Amherst Pierpont, said the minutes fell short in terms of offering up the specifics that investors have been clamouring for.
“Given all of the changes that we got in the statement and with the new framework, I thought there would be a lot of meat in the minutes fleshing out those changes. But on that front, I was a little bit disappointed,” he said. “Markets are craving some sort of black-and-white rule that they can sink their teeth into.”
Mr Stanley attributed the lack of specificity to the fact that FOMC members themselves have yet to reach a unanimous consensus. Two voting members dissented from the new statement in September, with Dallas Fed president Robert Kaplan saying he would have preferred that the Fed “retain greater policy rate flexibility”. Meanwhile, Neel Kashkari, the president of the Minneapolis Fed, sought to keep rates close to zero until inflation reached 2 per cent “on a sustained basis”.
The Fed minutes were released amid rising concerns about the fate of the US recovery due to the breakdown in negotiations in Washington over further fiscal stimulus, and some evidence in the data of slower job growth and weaker consumption.
Those worries were already apparent in mid-September. “Many participants noted that their economic outlook assumed additional fiscal support and that if future fiscal support was significantly smaller or arrived significantly later than they expected, the pace of the recovery could be slower than anticipated,” the minutes said.
Fed officials also warned about the potential economic damage that could arise should the coronavirus outbreak continue to rage on nationwide.
“Participants remained concerned about the possibility of additional virus outbreaks that could undermine the recovery,” the minutes said. “Such scenarios could result in increases in bankruptcies and defaults, put stress on the financial system, and lead to disruptions in the flow of credit to households and businesses.”
Some investors have also criticised the Fed for not providing more guidance when it comes to its asset purchases. It is currently buying approximately $80bn of Treasury securities of all maturities per month and $40bn of agency mortgage-backed securities, to push down market interest rates.
Given the sharp increase in issuance by the Treasury department to fund record stimulus packages passed earlier this year, some market participants believe the US central bank must soon buy more longer-dated debt or risk a potentially sharp rise in yields that could disrupt the Fed’s efforts to ensure financial conditions remain loose.
In this area, the minutes indicated that additional clarity may soon be forthcoming.
“Some participants also noted that in future meetings it would be appropriate to further assess and communicate how the committee’s asset purchase programme could best support the achievement of the committee’s maximum employment and price-stability goals,” they said.
“With no serious discussion about the possibility of increasing the pace of its large-scale asset purchases at this meeting either, we would view the minutes as hawkish,” added Paul Ashworth, chief US economist at Capital Economics.
Long-dated US Treasuries sold off after the release of the minutes, with the yield on the benchmark 10-year higher by 0.05 percentage points at 0.79 per cent. The S&P 500 continued its march higher, rising 1.7 per cent on Wednesday.