The US Federal Reserve is keen to revamp its forward guidance about future interest rates but terrified of a market misunderstanding, according to the minutes of its September meeting.
The minutes show an active Fed debate about what to do with its pledge of low rates for a “considerable time” after asset purchases stop in October, but no concrete ideas about how to replace it.
The notes show a Fed that is stuck between dislike for its current guidance – which many officials think is inflexible – and the lack of an alternative that does not hint at tighter monetary policy.
It suggests a chance that “considerable time” will survive past the Fed’s next meeting at the end of October if nobody comes up with a good replacement.
“Several” of the seventeen participants thought that the current guidance implied raising interest rates too late, and more worried about “considerable time” sounding like a commitment.
But when it came to changing it, a number of officials, “noted that changes to the forward guidance might be misinterpreted as a signal of a fundamental shift in the stance of policy that could result in an unintended tightening of financial conditions”.
When they do have to make a change in the guidance, most officials “indicated a preference for clarifying the dependence of the current forward guidance on economic data”, say the minutes. The use of “clarify” suggests the Fed might not choose to make wholesale changes.
Such a clarification could mean explaining that the timing and pace of rate rises will depend on the speed with which the economy is getting back to normal levels of jobs and inflation.
Only one Fed official wanted to scrap the forward guidance in their statement and only one favoured tying low interest rates to reaching a certain level of inflation. Based on their public statements, those officials may be Eric Rosengren of the Boston Fed and Narayana Kocherlakota of Minneapolis.
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The Fed made particular reference to the recent rise in the dollar and the effect it might have on US growth and inflation. The dollar is normally the Treasury’s territory, but Fed officials have grown more vocal recently.
Fed officials also sounded the alarm about a repeat of 2011, when the struggles of the eurozone economy hurt the US recovery.
“Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the US external sector,” say the minutes.
Fed officials continued to disagree about the amount of underemployment left in the labour market, although only a few had reservations about saying there is still “significant underutilisation”, another crucial passage in their meeting statement. Since their meeting, the unemployment rate fell from 6.1 to 5.9 per cent.
They also noted slower progress on inflation compared with their previous meeting. Inflation has been below the Fed’s 2 per cent goal for many months.