The Federal Open Market Committee (FOMC) minutes were released today from the meeting that ended on December 18. While detailed, not a lot of it was exciting. The biggest point of contention seemed to be around the outlook for inflation: Is below 2% inflation temporary, or not? That will be hashed out at subsequent meetings, but it was pleasant to see consensus about the reduction in the pace of asset purchases. The Committee weighed the marginal costs and benefits, and the ledger seems to favor a gradual diminution in asset purchases.
There is disagreement about how the Fed can best enhance its forward guidance—that is, to signal to the public how it wants to proceed in terms of eventually increasing the federal funds rate. The asset purchases were one way to augment the Fed’s commitment to keep rates low. Setting an unemployment rate threshold and inflation threshold were other ways to enhance guidance. The move at the December 18 meeting to state that members expect a zero-rate target well after the economy reaches the 6.5% unemployment rate threshold was another step in the evolution of forward guidance.
While the minutes may have been boring, they signal two important shifts for the Fed. One is about emphasizing inflation targeting over employment targeting. The other is in getting people comfortable with the Fed’s plan to target not only the federal funds rate but the overnight repurchase rate. These are two ways that the Fed could make monetary policy more effective, even as it gradually winds down its asset purchase program.