Federal Reserve policy makers, weighing options for an eventual exit from extraordinary easing, said continued stimulus to push unemployment lower doesn’t risk sparking an undesirable jump in the inflation rate.
With inflation expected to remain well below its 2 percent goal, the Federal Open Market Committee (FOMC) doesn’t “face a tradeoff between its employment and inflation objectives, and an expansion of aggregate demand would result in further progress relative to both objectives,” according to minutes of their April 29-30 meeting released today in Washington.
Fed officials also discussed the need to improve their guidance on the likely path of interest rates, and they heard a staff presentation on the tools that could eventually be used to control short-term borrowing costs once policy makers decide to lift them above zero.
Policy makers are watching progress toward their goal of full employment as they consider the timing of the first interest-rate increase since 2006. The Fed has said the benchmark rate is likely to stay low for a “considerable time” after it ends a bond-purchase program that’s set to wind down by late this year.
The Standard & Poor’s 500 Index rose 0.8 percent to 1,888.03 in New York, while the yield on the 10-year Treasury note increased to 2.53 percent from 2.51 percent yesterday.
“What shows through in the minutes is tremendous comfort on the inflation outlook,” said Dean Maki, chief U.S. economist at Barclays Plc in New York. “The prevailing view is that inflation will return to 2 percent over the next few years. The countervailing view is that it would take even longer.”
Acceptable Exit Tools
The Fed’s preferred inflation gauge, the personal consumption expenditures index, increased 1.1 percent in March from a year earlier. It has remained below the central bank’s 2 percent target for almost two years.
In their presentation, Fed staff said the exit tools that could be used to control short-term interest rates included overnight reverse-repurchase agreements, the term deposit facility, and interest on excess reserves, the minutes showed. Asset sales were not mentioned.
Participants agreed that “early communication” of their exit strategy “would enhance the clarity and credibility of monetary policy.” While no decisions were taken, “participants generally favored the further testing of various tools,” according to the minutes.
The policy-setting FOMC is made up of the Fed governors, the president of the Federal Reserve Bank, of New York and four seats held by the presidents of the other 11 Fed district banks on a rotating basis.
Fed officials at their March meeting scrapped a pledge to keep the main interest rate low at least as long as the jobless rate exceeded 6.5 percent and the outlook for inflation didn’t exceed 2.5 percent.
The FOMC discarded that commitment after unemployment fell close to the threshold, even as other gauges of the job market showed continued weakness. Instead, policy makers said in March that a decision to raise the rate will be based on a range of economic data.
“It was noted that the changes to the Committee’s forward guidance at the March FOMC meeting had been well understood by investors,” the minutes showed. “However, a number of participants emphasized the importance of communicating still more clearly about the Committee’s policy intentions as the time of the first increase in the federal funds rate moves closer.”
Fed Chair Janet Yellen testified to lawmakers May 7 that the Fed will probably end bond buying in the fall if the labor market continues to improve. Still, she said, “a high degree of monetary accommodation remains warranted,” with inflation and employment far from the central bank’s goals.
Federal Reserve Bank of New York President William C. Dudley said yesterday the pace of eventual interest-rate increases “will probably be relatively slow,” depending on the economy’s progress and how financial markets react.
A “mild” response “might encourage a somewhat faster pace,” he told the New York Association for Business Economics. “If bond yields were to move sharply higher,” on the other hand, “a more cautious approach might be warranted.”
“The Fed is very comfortable in their accommodative stance,” Lindsey Piegza, the Chicago-based chief economist for Sterne, Agee & Leach Inc., told Bloomberg Television May 15. “They’re going to err on the side of caution” and ensure “future growth comes to fruition before changing monetary policy.”
Jobless Rate at Its Lowest Level
Joblessness fell to a five-year low of 6.3 percent in April, down from 6.7 percent the prior month. Part of the drop stemmed from a decline in the labor-force participation rate to match the lowest level since 1978.
Hiring has accelerated, with employers adding 288,000 jobs in April for the biggest gain in two years. Monthly job creation this year has averaged 214,000.
Payrolls and other indicators point to the economy continuing to recover after growth stalled in the first quarter, in part because of harsh winter weather. Gross domestic product grew at the weakest pace since the last three months of 2012.
Growth will accelerate to 3.5 percent this quarter, according to the median of economists’ estimates compiled by Bloomberg. They project a 3 percent expansion in the third quarter and 3.1 percent in this year’s final three months.
“There’s been a gradual improvement, weather-related issues aside,” said Kathy Jones, a New York-based fixed-income strategist at Charles Schwab Corp., the largest U.S. independent brokerage with $2.31 trillion in client assets.