Evidently there was a lengthy debate between those who wanted to wait and those who favored a small reduction in bond purchases in September already. Moreover officials were worried about communication issues since the delay may well undermine the credibility or predictability of monetary policy. While most Fed officials saw QE tapering coming this year and halting the bond purchase program altogether in mid-2014, this was before the government shutdown and the looming debt ceiling showdown. As such, the probability that tapering is coming in early-2014 instead is growing.
Uncertainty not unusually high…
Most participants saw the uncertainty associated with their outlook for economic growth, the unemployment rate, and inflation as similar to that of the past 20 years. In addition, most participants considered the risks to the outlook for the unemployment rate and inflation as broadly balanced. While downside risks to the outlook for the economy and the labor market were generally viewed as having diminished since last fall, a number of significant risks remained, including those related to the potential economic effects of the sizable increases in interest rates since the spring, ongoing fiscal drag, and the possible fallout from near-term fiscal debates.
… but tighter financial conditions high on worry list
Participants discussed the extent to which the rise in longer-term interest rates since May reflected growing confidence about the economic outlook or a perception by financial markets that monetary policy would be less accommodative going forward. Several participants judged that overall financial conditions had tightened notably over the past few months, as seen most importantly in the rise in mortgage rates. While acknowledging that it was too early to assess the effects of such an increase, they expressed concerns that tighter financial conditions might weigh on the recovery in the housing sector. A few others observed that the increase in longer-term yields in recent months had not seemed to leave a meaningful imprint on other asset prices, suggesting that the effects on the economy were likely to be relatively muted. While recognizing the potentially significant impact of higher mortgage rates on the housing market, these same participants pointed to higher equity prices, the further gradual loosening of terms in bank lending, and the continued availability of credit at inexpensive terms in corporate debt markets as signs that financial conditions more generally had not tightened materially.
A hot and lengthy debate on tapering
In general, those who preferred to maintain for now the pace of purchases viewed incoming data as having been on the disappointing side and, despite clear improvements in labor market conditions since the purchase program’s inception in September 2012, were not yet confident of continued progress. Many of these participants pointed to near-term risks and uncertainties such as the effects on the housing sector and on the broader economy of the tightening in financial conditions in recent months, as well as about the considerable risks surrounding fiscal policy. Moreover, the announcement of a reduction in asset purchases at this meeting might trigger an additional, unwarranted tightening of financial conditions, perhaps because markets would read such an announcement as signaling the Committee’s willingness, notwithstanding mixed recent data, to take an initial step toward exit from its highly accommodative policy.
The participants who spoke in favor of moderating the pace of securities purchases at this meeting also cited the incoming data, but viewed those data as broadly consistent with the Committee’s outlook for the labor market at the time of the June FOMC meeting when the contingent expectation that the pace of asset purchases would be reduced later in the year was first presented to the public. With the markets apparently viewing a cut in purchases as the most likely outcome, it was noted that the postponement of such an announcement to later in the year or beyond could have significant implications for the effectiveness of Committee communications. In particular, concerns were expressed that a delay could potentially undermine the credibility or predictability of monetary policy. It was noted that if the Committee did not pare back its purchases in these circumstances, it might be difficult to explain a cut in coming months, absent clearly stronger data on the economy and a swift resolution of federal fiscal uncertainties. Most of the participants leaning toward a downward adjustment in the pace of asset purchases also indicated that they favored a relatively small reduction to signal the Committee’s intention to proceed cautiously
SEB