FOMC Minutes Excerpt: Discussion On Strategies at ELB>

     WASHINGTON (MNI) - The following is an excerpt of the Federal Open 

Market Committee minutes describing committee's policy action, 

published Wednesday for the September meeting: 

     Participants generally agreed with the staff's analysis that the 

risk of future ELB episodes had likely in-creased over time, and that 

future ELB episodes and the reduced effect of resource utilization on 

inflation could inhibit the Committee's ability to achieve its 

employment and inflation objectives.  The increased ELB risk was 

attributed in part to structural changes in the U.S. economy that had 

lowered the longer-run real short-term interest rate and thus the 

neutral level of the policy rate.  In this context, a couple of 

partici-pants noted that uncertainty about the neutral rate made it 

especially challenging to determine any ap-propriate changes to the 

current framework.  In light of a low neutral rate and shortfalls of 

inflation below the 2 percent objective for several years, some 

partici-pants raised the concern that the policy space to re-duce the 

federal funds rate in response to future re-cessions could be compressed 

further if inflation shortfalls continued and led to a decline in 

inflation expectations, a risk that was also discussed in the staff 

analysis.  These participants pointed to long, ongoing ELB spells in 

other major foreign economies and suggested that, to avoid similar 

circumstances in the United States, it was important to be aggressive 

when confronted with forces holding inflation below objec-tive.  A 

couple of participants judged that the lack of monetary policy space 

abroad and the possibility that fiscal space in the United States might 

be limited rein-forced the case for strengthening the FOMC's mone-tary 

policy framework as a matter of prudent plan-ning. 

     With regard to the current monetary policy frame-work, participants 

agreed that this framework served the Committee well in the aftermath of 

the financial crisis.  A number of participants noted that the 

Committee's experience with forward guidance and balance sheet policies 

would likely allow the Commit-tee to deploy these tools earlier and more 

aggressively in the event that they were needed.  A few indicated that 

the uncertainty about the effectiveness of these policies was smaller 

than the uncertainty surrounding the effectiveness of a makeup strategy. 

     Participants generally agreed that the current frame-work also 

served the Committee well by providing a strong commitment to achieving 

the Committee's maximum-employment and symmetric inflation ob-jectives.  

Such a commitment was seen as flexible enough to allow the Committee to 

choose policy ac-tions that best support its objectives in a wide array 

of economic circumstances.  Because of the downside risk to inflation 

and employment associated with the ELB, most participants were open to 

the possibility that the dual-mandate objectives of maximum em-ployment 

and stable prices could be best served by strategies that deliver 

inflation rates that over time are, on average, equal to the Committee's 

longer-run ob-jective of 2 percent.  Promoting such outcomes may require 

aiming for inflation somewhat above 2 percent when the policy rate was 

away from the ELB, recog-nizing that inflation would tend to be lower 

than 2 percent when the policy rate was constrained by the ELB.  

Participants suggested several alternatives for doing so, including 

strategies that make up for past inflation shortfalls and those that 

respond more ag-gressively to below-target inflation than to 

above-target inflation.  In this context, several participants suggested 

that the adoption of a target range for infla-tion could be helpful in 

achieving the Committee's objective of 2 percent inflation, on average, 

as it could help communicate to the public that periods in which the 

Committee judged inflation to be moderately away from its 2 percent 

objective were appropriate.  A cou-ple of participants suggested 

analyzing policies in which there was a target range for inflation whose 

midpoint was modestly higher than 2 percent or in which 2 percent was an 

inflation floor; these policies might enhance policymakers' scope to 

provide ac-commodation as appropriate when the neutral real interest 

rate was low. 

--MNI Washington Bureau; tel: +1 202-371-2121; email: 

jean.yung@marketnews.com 

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