The release of the FOMC December minutes last Thursday was viewed by markets as a negative shock. Commentators and market participants focused in particular on what they viewed as “new” information, namely, that FOMC participants were divided over the best time to stop the newly extended quantitative easing programs. Some favored early 2013, some looked to the end of the year, and others favored sometime in 2014. It is puzzling to close followers of the FOMC and its deliberations that this lack of consensus was regarded as “news”.
There are several reasons why the existence of these differences in views should not have been a surprise, nor regarded as valuable information that generated the kind of market reaction it did. First, for more than a year it has been no secret that several FOMC participants have been concerned about the quantitative easing component of the Fed’s easy-money policy. For example, President Lacker has been a long-time dissenter, expressing concern both about the need for the program as well as the appropriateness of purchasing mortgage-backed securities rather than confining Fed purchases to Treasuries. And there have been others who have expressed reservations but who were non-voting members and hence unable to dissent, if they had so desired.
Second, some FOMC members have also expressed concern, again reflected in previous minutes, about possible diminishing returns from the quantitative easing policies. So even if they had initially supported the program, it was clear that some members were beginning to worry about the tradeoffs associated with its continuation, the complications that may arise in engineering a smooth exit strategy, and the distortions that the program was introducing in certain asset markets.
Third, and most important, FOMC participants have been quite outspoken in speeches, and previous minutes have been quite transparent, about ongoing review of the Committee’s communications strategy and that specifying targets for key economic indicators was a very real possibility. The Committee made that change in December, together with continuing its asset purchase programs. What was also apparent from Chairman Bernanke’s press conference – and we have written on this point in a previous commentary – is that the numerical thresholds were simply guides and not hard and fast triggers. He made it clear, for example, that the 6.5% unemployment number was only one piece of information, reflecting labor-market conditions more broadly, that the Committee would consider when the 6.5% was approached or breached.
Similarly, the Committee stated that the inflation leg of its two-pronged target policy would be determined by its review of inflation forecasts one or two years into the future and a determination of whether inflation expectations were or were not well-anchored. Following the December meeting, the Committee also released information on participants’ forecasts, together with information on each participant’s view on the likely timing of the Committee’s first interest-rate increase. What is striking is the wide range of participants’ forecasts for the likely path of GDP growth. For 2013, the time period for which the press has focused on the supposed disagreements as to when to stop the Fed’s asset purchase programs, the upper-range forecast for GDP growth was 3.2 percent and the lower range was 2 percent. Even the central tendency range was wide. The upper bound was 3 percent and the lower bound was 2.3 percent. These disparate forecasts imply that various Committee members also saw substantially different job-growth paths. Historically, such a spread in projections would translate to a difference of about a 50 thousand a month in the number of jobs created and would imply substantially different conditions in the labor market.
The December FOMC announcement also provided information on participants’ judgments as to the appropriate timing for the first increase in the federal funds rate. Two participants saw the first increases in 2013, and five thought the first increases would occur in 2014. Given the disparate growth projections and the timing differences, it should not rate as news that participants would have different views about stopping the asset purchases. Stopping or phasing out those programs would surely precede any rate increase.
Given the availability of this information, the market response to the news in the minutes suggests that those who lost money on the December FOMC announcement lost money again on the instant replay when the minutes were released.