MNI POLICY: Fed Debates Forward Guidance, Yield Caps: Minutes

By Pedro Nicolaci da Costa

     WASHINGTON (MNI) - Federal Reserve officials in June discussed in detail

how to offer more concrete guidance about how long they expect to keep interest

rates near zero as well as how to structure future asset purchases but decided

to hold off until the public health outlook becomes less uncertain. 

     According to the minutes of the June FOMC meeting released Wednesday, the

U.S. central bank remains squarely focused on whether it might need to do more

to help an ailing economy. A recent spike in new cases has markets nervous about

a second wave hit to an already battered economy.

     The Fed clearly has a de facto easing bias in monetary policy and is

nowhere near considering reversing course and tightening policy. "Participants

noted that a highly accommodative stance of monetary policy would likely be

needed for some time to achieve the 2% inflation objective over the longer run."

     Most participants said the Fed should communicate "a more explicit form of

forward guidance for the path of the federal funds rate and provide more clarity

regarding purchases of Treasury securities and agency MBS as more information

about the trajectory of the economy becomes available," the report said. 

     A number of officials favored tying forward guidance to an inflation

outcome "that could possibly entail a modest temporary overshooting of the

Committee's longer-run inflation goal but where inflation fluctuations would be

centered on 2 percent over time." A couple officials wanted to tie guidance to

the unemployment rate instead. Generally they "indicated support for

outcome-based forward guidance" and said the outcome of their yearlong framework

review could help communicate their policy intentions.  

     On asset purchases, officials heard from Fed staff regarding yield caps but

"had many questions regarding the costs and benefits of such an approach" and

asked staff to conduct further analysis of the design and implementation of

these policies.

     --CONSIDERABLE DOWNSIDE RISK

     Fed officials agreed that the pandemic "will weigh heavily on economic

activity, employment, and inflation in the near term and would pose considerable

risks to the economic outlook over the medium term." 

     "A number of participants judged that there was a substantial likelihood of

additional waves of outbreaks, which, in some scenarios, could result in further

economic disruptions and possibly a protracted period of reduced economic

activity." 

     In worst-case scenarios, "more business closures would occur, and workers

would experience longer spells of unemployment" that would see their skills

eroded. To the extent that social distancing measures reduced productivity or

did permanent damage to investment, "the longer-run level of potential output

could be reduced."

     "Participants also regarded highly accommodative monetary policy and

sustained support from fiscal policy as likely to be needed to facilitate a

durable recovery in labor market conditions." 

--MNI Washington Bureau; +1 202 371 2121; email: pedro.dacosta@marketnews.com

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