Excerpt on policy from March 18-19 FOMC minutes

The following is an excerpt covering the Federal Open Market Committee's discussion of monetary policy taken from the minutes of the FOMC's March 18-19 meeting, which were released on Wednesday.

For a full text, see http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

"Committee members saw the information received over the intermeeting period as indicating that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remained elevated when judged against members' estimates of the longer-run normal rate of unemployment. Household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow. Fiscal policy was restraining economic growth, although the extent of restraint had diminished. The Committee expected that, with appropriate policy accommodation, the economy would expand at a moderate pace and labor market conditions would continue to improve gradually, moving toward those the Committee judges consistent with the dual mandate. Moreover, members judged that the risks to the outlook for the economy and the labor market were nearly balanced. Inflation was running below the Committee's longer-run objective, and this was seen as posing possible risks to economic performance, but members anticipated that stable inflation expectations and strengthening economic activity would, over time, return inflation to the Committee's 2 percent objective. However, in light of their concerns about the possible persistence of low inflation, members agreed that inflation developments should be monitored carefully for evidence that inflation was moving back toward the Committee's longer-run objective.

"In their discussion of monetary policy in the period ahead, members agreed that there was sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, members decided that it would be appropriate to make a further measured reduction in the pace of its asset purchases at this meeting. Members again judged that, if the economy continued to develop as anticipated, the Committee would likely reduce the pace of asset purchases in further measured steps at future meetings. Members also underscored that the pace of asset purchases was not on a preset course and would remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of purchases. Accordingly, the Committee agreed that, beginning in April, it would add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and would add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month. While making a further measured reduction in its pace of purchases, the Committee emphasized that its holdings of longer-term securities were sizable and would still be increasing, which would promote a stronger economic recovery by maintaining downward pressure on longer-term interest rates, supporting mortgage markets, and helping to make broader financial conditions more accommodative. The Committee also reiterated that it would continue its asset purchases, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. One member, while concurring with this policy action, suggested that in future statements the Committee might provide further information about the trajectory of the Federal Reserve's balance sheet, including information about when the Committee might discontinue its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities.

"With respect to forward guidance about the federal funds rate, all members judged that, as the unemployment rate was likely to fall below 6�� percent before long, it was appropriate to replace the existing quantitative thresholds at this meeting. Almost all members judged that the new language should be qualitative in nature and should indicate that, in determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee would assess progress, both realized and expected, toward its objectives of maximum employment and 2 percent inflation. However, a couple of members preferred to include language in the statement indicating that the Committee would keep rates low if projected inflation remained persistently below the Committee's 2 percent longer-run objective. One of these members argued that the Committee should continue to provide quantitative thresholds for both the unemployment rate and inflation.

"Members also considered statement language that would provide information about the anticipated behavior of the federal funds rate once it is raised above its effective lower bound. The Committee decided that it was appropriate to add language indicating that the Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. In discussing this addition, a couple of members suggested that language along these lines might better be introduced at a later meeting. However, another member indicated that adding the new language at this stage could be beneficial for the effectiveness of policy because financial conditions depend on both the length of time that the federal funds rate is at the effective lower bound and on the expected path that the federal funds rate will follow once policy firming begins. It was also noted that the postmeeting statements, rather than the SEP, provide the public with information on the Committee's monetary policy decisions and that it was therefore appropriate for the postmeeting statement to convey the Committee's position on the likely future behavior of the federal funds rate."