WASHINGTON (MaceNews) – The Federal Reserve’s top policymakers wanted to gear forward guidance more to explaining how asset purchases would remain calibrated to the state of the economy at their meeting at the beginning of the month, their minutes showed Wednesday.
The suggestion for more definitive guidance, however, fell far short of expectations that the Federal Open Market Committee would discuss actual changes in the pace and composition of asset purchases.
Otherwise the discussion of the Board members and presidents of the regional banks was entirely as assumed, seeing a better-than-expected recovery accompanied by continuing uncertainty about how much of the economy is being left behind.
The text of the participants’ discussion minutes follows, with boldfaced emphasis added:
Participants’ Views on Current Conditions and the Economic Outlook
Participants noted that the COVID-19 pandemic was causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment had continued to recover but remained well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices had been holding down consumer price inflation. Overall financial conditions remained accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Participants agreed that the path of the economy would depend on the course of the virus and that the ongoing public health crisis would continue to weigh on economic activity, employment, and inflation in the near term and posed considerable risks to the economy’s medium-term outlook.
Participants observed that the economy had registered a rapid though incomplete rebound, with third-quarter real GDP rising at an annual rate of 33 percent, reflecting gains across consumer spending, housing-sector activity, and business equipment investment. In recent months, however, the pace of improvement had moderated, with slower growth expected for the fourth quarter. Participants noted that economic activity thus far had recovered faster than had been expected earlier in the year. Household spending on goods, especially durable goods, had been strong and had moved above its pre-pandemic level. Participants commented that the rebound in consumer spending was due in part to federal stimulus payments and expanded unemployment benefits, which provided essential support to many households. Participants viewed accommodative monetary policy as also contributing to gains in durable goods and residential investment as well as the surge in home sales. In contrast, participants noted that consumer outlays for services were increasing more slowly than for durable goods, particularly for items such as air travel, hotel accommodations, and restaurant meals, which had been significantly disrupted by voluntary and mandated social-distancing measures. Participants generally expected the strength in household spending to continue, especially for durable goods and residential investment. A few participants noted that households’ balance sheets generally appeared healthy and an unwinding of the large pool of household savings accumulated during the pandemic could provide greater-than-anticipated momentum to consumer spending over coming months. However, several participants expressed concern that, in the absence of additional fiscal support, lower- and moderate-income households might need to reduce their spending sharply when their savings were exhausted. A couple of these participants noted reports from their banking contacts that households appeared to be rapidly exhausting funds they received from fiscal relief programs.
Participants noted that business equipment investment had also picked up. A few participants expected the momentum in investment to extend into next year as the economic recovery continued, while a couple of other participants noted that many businesses in their Districts were deferring longer-term commitments because of heighted uncertainty about the economic outlook. The recovery was viewed as unevenly distributed across industries. While many business contacts, particularly those in the durable goods or housing industries, reported progress in adapting to the pandemic or improved business conditions, others—especially those with ties to small businesses and the hospitality, aviation, and nonresidential construction industries—were still seeing very difficult circumstances. Contacts reported improved conditions in the agricultural sector, boosted by strong demand from China as well as domestic ethanol production, higher crop prices, and federal aid payments. Looking ahead, some business contacts expressed concerns that many households and businesses were currently in a weaker position to weather additional economic shocks than they had been at the beginning of the pandemic.
Participants observed that labor market conditions had continued to improve in recent months, with roughly half of the 22 million jobs lost over March and April having been regained. The unemployment rate had declined further, and the employment gains since the spring were generally seen as larger than anticipated. Business contacts in a couple of Districts – particularly those in the manufacturing, health-care, and technology sectors – reported having trouble hiring workers for reasons likely related to virus cases or workers’ need to provide childcare. Several participants noted that the decline in the unemployment rate in recent months had been accompanied by a fall in the labor force participation rate, particularly among those with a high school education or lower and among women. Although the number of workers on temporary layoff had fallen sharply, the number of permanent job losers had continued to rise. Most participants commented that the pace of labor market improvement was likely to moderate going forward. A couple of them noted that many businesses in industries severely affected by the pandemic were downsizing or that some businesses were focused on cutting costs or increasing productivity, including through automation. Many participants observed that high rates of job losses had been especially prevalent among lower-wage workers, particularly in the services sector, and among women, African Americans, and Hispanics. A few participants noted that these trends, if slow to reverse, could exacerbate racial, gender, and other social-economic disparities. In addition, a slow job market recovery would cause particular hardship for those with less educational attainment, less access to childcare or broadband, or greater need for retraining.
In their comments about inflation, participants noted that some consumer prices had increased more quickly than expected in recent months but that broader price trends were still quite soft. The upturn in consumer price inflation was primarily attributed to price increases in sectors where the pandemic had induced stronger demand, such as consumer durables. In contrast, services price inflation remained softer than pre-pandemic rates, as prices for the categories most affected by social distancing, such as accommodations and airfares, continued to be very depressed and housing services inflation moderated. Several participants commented on the unusually large relative price movements caused by the pandemic and the considerable uncertainty as to how long these price changes would persist.
Participants noted that financial conditions were generally accommodative and that actions by the Federal Reserve, including the establishment of emergency lending facilities with the approval of and, in some cases, provision of equity investments by the Treasury, were supporting the flow of credit to households, businesses, and communities. While these actions were viewed as contributing to accommodative financial conditions, participants noted important differences in credit availability across borrowers. In particular, financing conditions eased further for residential mortgage borrowers and for large corporations that were able to access capital markets, but surveys of credit availability indicated that bank lending conditions tightened further. A few participants noted that the financing conditions for small businesses were especially worrisome, as the PPP had ended and the prospect for additional fiscal support remained uncertain. They pointed to the most recent Census Bureau Small Business Pulse Survey, in which more than half of the respondents reported having no more than two months of cash on hand.
Participants continued to see the uncertainty surrounding the economic outlook as quite elevated, with the path of the economy highly dependent on the course of the virus; on how individuals, businesses, and public officials responded to it; and on the effectiveness of public health measures to address it. Participants cited several downside risks that could threaten the recovery. While another broad economic shutdown was seen as unlikely, participants remained concerned about the possibility of a further resurgence of the virus that could undermine the recovery. The majority of participants also saw the risk that current and expected fiscal support for households, businesses, and state and local governments might not be sufficient to sustain activity levels in those sectors, while a few participants noted that additional fiscal stimulus that was larger than anticipated could be an upside risk. Some participants commented that the recent surge in virus cases in Europe and the reimposition of restrictions there could lead to a slowdown in economic activity in the euro area and have negative spillover effects on the U.S. recovery. Some participants raised concerns regarding the longer-run effects of the pandemic, including sectoral restructurings that could slow employment growth or an acceleration of technological disruptions that could be limiting the pricing power of some firms.
A number of participants commented on various potential risks to financial stability. A few participants noted that the banking system showed considerable resilience through the end of the third quarter, and a few observed that this resilience partly reflected stronger-than-expected balance sheets of their customers, with delinquency rates declining or showing only moderate increases. Moreover, capital positions and loan loss reserves for large banks were higher than before the pandemic. Several participants emphasized the need to ensure that banks continue to maintain strong capital levels, as lower levels of capital are typically associated with tighter credit availability from banks. Several participants commented on the vulnerabilities witnessed during the March selloff in the Treasury market. The substantial maturity and liquidity transformations undertaken by some nonbank financial institutions – such as prime MMFs and corporate bond and bank loan mutual funds – were also discussed. A couple of participants expressed concerns that a prolonged period of low interest rates and highly accommodative financial market conditions could lead to excessive risk-taking, which in turn could result in elevated firm bankruptcies and significant employment losses in the next economic downturn. A few participants noted that climate change poses important challenges to financial stability and welcomed analysis of climate change as both a source of shocks and an underlying vulnerability. A couple of participants commented that the actions taken by the Federal Reserve to support the economy and achieve its mandated goals also supported financial stability. Relatedly, several participants emphasized the important roles various section 13(3) facilities played in restoring financial market confidence and supporting financial stability; they noted that these facilities were still serving as an important backstop in financial markets. A few participants noted that it was important to extend them beyond year-end.
In their consideration of monetary policy at this meeting, participants reaffirmed the Federal Reserve’s commitment to using its full range of tools in order to support the U.S. economy during this challenging time, thereby promoting the Committee’s statutory goals of maximum employment and price stability. Participants agreed that the path of the economy would depend significantly on the course of the virus and that the ongoing public health crisis would continue to weigh on economic activity, employment, and inflation in the near term and posed considerable risks to the economic outlook over the medium term. In light of this assessment, all participants judged that maintaining an accommodative stance of monetary policy was essential to foster economic recovery and to achieve the Committee’s long-run 2 percent inflation objective.
Participants remarked that the Committee’s action in September to provide more explicit outcome-based forward guidance for the federal funds rate had been an important step to affirm the Committee’s strong commitment to the goals and strategy articulated in its revised Statement on Longer-Run Goals and Monetary Policy Strategy. Several participants noted that they were encouraged by evidence that suggested that market participants’ expectations of the economic conditions that would likely prevail at the time of liftoff seemed broadly consistent with the Committee’s forward guidance and revised consensus statement.
Participants agreed that monetary policy was providing substantial accommodation, and most concurred that, with the federal funds rate at the ELB, much of that accommodation was due to the Committee’s forward guidance and increases in securities holdings. They judged that the current stance of monetary policy remained appropriate, as both employment and inflation remained well short of the Committee’s goals and the uncertainty about the course of the virus and the outlook for the economy continued to be very elevated. Participants viewed the resurgence of COVID-19 cases in the United States and abroad as a downside risk to the recovery; a few participants noted that diminished odds for further significant fiscal support also increased downside risks and added to uncertainty about the economic outlook.
Regarding asset purchases, participants judged that it would be appropriate over coming months for the Federal Reserve to increase its holdings of Treasury securities and agency MBS at least at the current pace. These actions would continue to help sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses. Many participants judged that the Committee might want to enhance its guidance for asset purchases fairly soon. Most participants favored moving to qualitative outcome-based guidance for asset purchases that links the horizon over which the Committee anticipates it would be conducting asset purchases to economic conditions. A few participants were hesitant to make changes in the near term to the guidance for asset purchases and pointed to considerable uncertainty about the economic outlook and the appropriate use of balance sheet policies given that uncertainty.
Discussion on Recommended Changes to the Summary of Economic Projections
Participants considered two recommendations from the subcommittee on communications for changes to the Summary of Economic Projections (SEP) that would enhance the information provided to the public. These recommendations included accelerating the release of the full set of SEP exhibits from three weeks after the corresponding FOMC meeting, when the minutes of that meeting are released, to the day of the policy decision and adding new charts that display a time series of diffusion indexes for participants’ judgments of uncertainty and risks. With these recommendations, the written summary of the projections that has been included as an addendum to the minutes of the corresponding FOMC meeting would be discontinued.
Most of the participants who commented noted that releasing all SEP materials at the time of the postmeeting statement would provide greater context for the policy decision, highlight the risk-management factors relevant for the decision, or further emphasize the degree of uncertainty around participants’ modal projections. Some who commented noted that the SEP serves a valuable role in illustrating how participants’ policy assessments respond to changes in the economic outlook. Most participants who commented suggested that it would be useful to continue thinking about options for refining the SEP. Participants unanimously supported the recommended changes and agreed that they should be implemented beginning in December.
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