US Economy

Fed Minutes: Policymakers Divided Over How to Apply New Policy Framework

The Federal Open Market Committee on Wednesday released minutes from its September 15-16 meeting. The Fed’s policymaking arm held interest rates steady at the meeting and approved language outlining its new approach to inflation.

Among the highlights in the minutes, Federal Reserve officials worried about what would happen if fiscal aid would decrease or disappear. Additionally, the central bank held its benchmark interest rate near zero and said it would stay there until inflation averaged at least 2% over a period of time. However, officials said they didn’t see the need for providing clearer guardrails for what it would take to raise rates.

Unease Among Officials Over New Interest-Rate Strategy

Federal Reserve Chairman Jerome Powell and his allies on the central bank policymaking board faced skepticism and opposition in trying to guide markets about the future path of interest rates, minutes of their September meeting released Wednesday revealed.

After their meeting, the FOMC released a statement vowing to keep interest rates near zero until inflation is on track to moderately exceed the central bank’s 2% target for some time. Fed officials also released projections showing they expected rates would stay near zero until the end of 2023 at least.

There were two dissents from the new forward guidance from the ten voting members of the committee. It wasn’t known until the minutes were published Wednesday that unease about the new policy was fairly broad among the remaining seven officials who didn’t vote.

According to the minutes, “several” of these Fed officials balked at the strategy, in part because the guidance could limit the central bank’s flexibility. They also argued that by influencing the market’s view about the future path of short-term interest rates, “such guidance could contribute to a buildup of financial imbalances that would make it more difficult for the FOMC to achieve its objectives in the future.”

A “couple” of Fed officials argued against the strategy for different reasons. They wanted the Fed commitment to keep interest rates near zero to be even stronger and less qualified. They wanted the Fed to say that the policy rate would remain near zero until inflation had moved above 2% for some time.

In what might cause confusion to investors, Fed officials stressed the new strategy was not “an unconditional commitment” to a particular path of interest rates. Information pointing to a stronger economic recovery in the wake of the coronavirus pandemic would tend to lead to expectations for a shorter period of rates kept near zero and vice versa, the Fed said.

FOMC Says Current Forward Guidance is Sufficient

Traders have been looking for enhanced forward guidance about what specific benchmarks the FOMC would use as criteria. However, members said that the new language indicating a target of inflation averaging above 2% for a period of time would be sufficient.

“Most participants supported providing more explicit outcome-based forward guidance for the federal funds rate that included establishing criteria for lifting the federal funds rate above the [current level near zero] in terms of the paths for employment or inflation or both,” the minutes said. “However, with longer-term interest rates already very low, there did not appear to be a need for enhanced forward guidance at this juncture or much scope for forward guidance to put additional downward pressure on yields.”

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James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.