FOMC Meeting Minutes RECAP

The Fed is cautious about cutting back on quantitative easing in the near term. But guidance still calls for reduced asset purchases if the recovery continues on track. The September decision is going to be data dependent. Low inflation is seen by some FOMC participants as reason for continuing asset purchases as currently planned.

Policy direction is under heavy debate within the Fed. The first questions are whether the labor market is improving enough and whether inflation is yet a concern. It appears that most FOMC participants see current inflation as low but diverge on whether quantitative easing raises medium term risks for inflation. Most FOMC participants see the labor market as improving but still sluggish.

Slow inflation seems to be as much of a concern as high unemployment.

“In addition to updating its description of the state of the economy, the Committee decided to underline its concern about recent shortfalls of inflation from its longer run goal by including in the statement an indication that it recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, while also noting that it continues to anticipate that inflation will move back toward its objective over the medium term.”

The minutes indicate that unwinding is likely to be gradual and rate changes will be slow.
“Moreover, investors may have perceived that Committee communications about the possibility of slowing the pace of asset purchases also implied a higher probability of an earlier firming of the federal funds rate. Subsequent Federal Reserve communications, which emphasized that decisions about the two policy tools were distinct and underscored that a highly accommodative stance of monetary policy would remain appropriate for a considerable period after purchases are completed, were seen as having helped clarify the Committee’s policy strategy.”

Markets initially fell on the news but after second thoughts rebounded later in the trading day.