FOMC Minutes Excerpt: Forward Guidance, QE Discussion>

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

Market Committee minutes describing committee's policy action, 

published Wednesday for the October meeting: 

     Participants discussed the relative merits of qualitative, 

date-based, and outcome-based forward guidance. A number of participants 

noted that each of these three forms of forward guidance could be 

effective in providing accommodation, depending on circumstances both at 

and away from the ELB. They also suggested that different types of 

forward guidance would likely be needed to address varying economic 

conditions, and that the communications regarding forward guidance 

needed to be tailored to explain the Committees evaluation of the 

economic outlook. In particular, several participants emphasized that to 

guard against the possibility of adverse feedback loops in which forward 

guidance is interpreted by the public as a sign of a sharply 

deteriorating economic outlook, thus leading households and businesses 

to become even more cautious in their spending decisions, the Committee 

would need to clearly communicate how its announced policy could help 

promote better economic outcomes. Participants saw both benefits and 

costs associated with outcome-based forward guidance relative to other 

forms of forward guidance. On the one hand, relative to qualitative or 

date-based forward guidance, outcome-based forward guidance has the 

advantage of creating an explicit link between future monetary policy 

actions and macroeconomic conditions, thereby helping to support 

economic stabilization efforts and foster transparency and 

accountability. On the other hand, outcome-based forward guidance could 

be complex and difficult to explain and, hence, could potentially be 

less effective than qualitative or date-based forward guidance if those 

hurdles could not be overcome. A few participants commented that 

outcomebased forward guidance, tied to inflation outcomes, could be a 

useful tool to reinforce the Committees commitment to its symmetric 2 

percent objective. 

     Participants also discussed the benefits and costs of using 

different types of balance sheet policy. Participants generally agreed 

that the balance sheet policies implemented by the Federal Reserve after 

the crisis had eased financial conditions and had contributed to the 

economic recovery, and that those tools had become an important part of 

the Committees current toolkit. However, some participants pointed out 

that research had produced a sizable range of estimates of the magnitude 

of the economic effects of balance sheet actions. In addition, some 

participants noted that the effectiveness of these tools might be 

diminished in the future, as longerterm interest rates have declined to 

very low levels and would likely be even lower following an adverse 

shock that could lead to the resumption of large-scale asset purchases; 

as a result, there might be limited scope for balance sheet tools to 

provide accommodation. Several participants commented on the advantages 

and disadvantages of flow-based asset purchase programs tied to the 

achievement of economic outcomes. On the one hand, such programs 

adjusted automatically in response to the performance of the economy 

and, hence, were more straightforward to implement and communicate. On 

the other hand, flow-based asset purchase programs may result in the 

balance sheet rising to undesirable levels. A few participants also 

commented that, barring significant dislocations to particular segments 

of the markets, they would restrict asset purchases to Treasury 

securities to avoid perceptions that the Federal Reserve was engaging in 

credit allocation across sectors of the economy. 

     In considering policy tools that the Federal Reserve had not used 

in the recent past, participants discussed the benefits and costs of 

using balance sheet tools to cap rates on short- or long-maturity 

Treasury securities through open market operations as necessary. A few 

participants saw benefits to capping longer-term interest rates that 

more directly influence household and business spending. In addition, 

capping longer-maturity interest rates using balance sheet tools, if 

judged as credible by market participants, might require a smaller 

amount of asset purchases to provide a similar amount of accommodation 

as a quantity-based program purchasing longer-maturity securities. 

However, many participants raised concerns about capping long-term 

rates. Some of those participants noted that uncertainty regarding the 

neutral federal funds rate and regarding the effects of rate ceiling 

policies on future interest rates and inflation made it difficult to 

determine the appropriate level of the rate ceiling or when that ceiling 

should be removed; that maintaining a rate ceiling could result in an 

elevated level of the Federal Reserves balance sheet or significant 

volatility in its size or maturity composition; or that managing 

longer-term interest rates might be seen as interacting with the federal 

debt management process. By contrast, a majority of participants saw 

greater benefits in using balance sheet tools to cap shorter-term 

interest rates and reinforce forward guidance about the near-term path 

of the policy rate. 

     All participants judged that negative interest rates currently did 

not appear to be an attractive monetary policy tool in the United 

States. Participants commented that there was limited scope to bring the 

policy rate into negative territory, that the evidence on the beneficial 

effects of negative interest rates abroad was mixed, and that it was 

unclear what effects negative rates might have on the willingness of 

financial intermediaries to lend and on the spending plans of households 

and businesses. Participants noted that negative interest rates would 

entail risks of introducing significant complexity or distortions to the 

financial system. In particular, some participants cautioned that the 

financial system in the United States is considerably different from 

those in countries that implemented negative interest rate policies, and 

that negative rates could have more significant adverse effects on 

market functioning and financial stability here than abroad. 

Notwithstanding these considerations, participants did not rule out the 

possibility that circumstances could arise in which it might be 

appropriate to reassess the potential role of negative interest rates as 

a policy tool. 

     Overall, participants generally agreed that the forward guidance 

and balance sheet policies followed by the Federal Reserve after the 

financial crisis had been effective in providing stimulus at the ELB. 

With estimates of equilibrium real interest rates having declined 

notably over recent decades, policymakers saw less room to reduce the 

federal funds rate to support the economy in the event of a downturn. In 

addition, against a background of inflation undershooting the symmetric 

2 percent objective for several years, some participants raised the 

concern that the scope to reduce the federal funds rate to provide 

support to economic activity in future recessions could be reduced 

further if inflation shortfalls continued and led to a decline in 

inflation expectations. Therefore, participants generally agreed it was 

important for the Committee to keep a wide range of tools available and 

employ them as appropriate to support the economy. Doing so would help 

ensure the anchoring of inflation expectations at a level consistent 

with the Committees symmetric 2 percent inflation objective. 

     Some participants noted that the form of the policy response would 

depend critically on the circumstances the Committee faced at the time. 

Several participants suggested that communicating to the public clearly 

and convincingly in advance about how the Committee intended to provide 

accommodation at the ELB would enhance public confidence and support the 

effectiveness of whichever tool the Committee selected. Some 

participants thought it would be helpful for the Committee to evaluate 

how its tools could be utilized in different economic scenarios, such as 

when longer-term interest rates were significantly below current levels, 

and discuss which actions would best address the challenges posed by 

each scenario. Several participants noted that, particularly if monetary 

policy became severely constrained at the ELB, expansionary fiscal 

policy would be especially important in addressing an economic downturn. 

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

jean.yung@marketnews.com 

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