FOMC Officials Prepared to Give More Forward Guidance, Not Prepared to Adopt Rate Targets
by Craig Dismuke, Dudley Carter
The FOMC’s June 10 Meeting Minutes reflect uncertainty, heightened downside risks, a current preference for forward guidance and asset purchases over yield curve control, and a Fed prepared to use these tools in the near future.
Bleak Economic Outlook
The Minutes note that “Participants judged that the effects of the coronavirus outbreak and the ongoing public health crisis 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 concerns were raised about the strength of the rebound. As it relates to the consumer, the Minutes highlight that “the recovery in consumer spending was not expected to be particularly rapid beyond this year, with voluntary social distancing, precautionary saving, and lower levels of employment and income restraining the pace of expansion over the medium term.” Business investment is expected to be “constrained” because of uncertainty and heightened risks. Moreover, participants expect that the changing dynamics would “likely mean that some proportion of businesses would close permanently.”
Monetary Policy Toolkit
In the discussion of their monetary policy toolkit, officials clearly favor forward guidance and asset purchases over yield curve control (YCT as they reference it). Three experiences with YCT were discussed: the U.S. following WWII, Japan since 2016, and Australia since March. In the U.S. experience, ceilings were set for the 3-month, 12-month, and long-term Treasurys for almost ten years. The Bank of Japan has had a rate target in place for its 10-year yield in order to maintain some shape to its yield curve. The Reserve Bank of Australia has pegged its 3-year yield as reinforcement of its future plans for its main policy rate. However, “In their discussion of the foreign and historical experience with YCT policies and the potential role for such policies in the United States, nearly all participants indicated that they had many questions regarding the costs and benefits of such an approach.” Furthermore, “many participants remarked that, as long as the Committee’s forward guidance remained credible on its own, it was not clear that there would be a need for the Committee to reinforce its forward guidance with the adoption of a YCT policy.” If they become comfortable with the concept in the future, participants generally believe the RBA policy is “most relevant for current circumstances in the United States.”
In contrast to their uncertainty regarding YCT, “participants agreed” that they now have “extensive experience” with forward guidance and large-scale asset purchases, and that “they have become key parts of the monetary policy toolkit.” Related to forward guidance, more participants appeared to favor outcome-based guidance tied to inflation followed by guidance tied to an unemployment rate outcome.
Setting up More Easing
The Minutes appear to pave the way for additional easing with their preferred tools in the near future. While “Participants agreed that the current stance of monetary policy remained appropriate” at the June meeting, “many noted that the Committee could, at upcoming meetings, further clarify its intentions with respect to its future monetary policy decisions as the economic outlook becomes clearer.” Further clarification may come in the form of the ongoing monetary policy framework review. The Minutes note, “Many participants remarked that the completion of the monetary policy framework review … would help clarify further how the Committee intends to conduct monetary policy going forward.”