Fed minutes from June 9-10 meeting suggest interest in enhanced forward guidance; no yield curve caps for now

Overall, the minutes of the Fed’s June 9-10 FOMC meeting confirmed the members’ views that the Fed was comfortable with sustaining its current expansive monetary policies, with few expressing concerns.

The meeting included an extensive discussion about the Fed’s monetary policy options with the Fed funds rate at its effective lower bound (ELB), the ongoing public health crisis and its effects on economic activity, the extraordinary amount of uncertainty, and the need for ongoing accommodative monetary policy and supportive fiscal initiatives to ensure a sustained recovery. The Fed will soon reveal the conclusions from the review of its monetary policy framework and an updated statement on its longer-run goals and policy strategy, which members believe will provide more clarity on the Fed’s monetary policy actions going forward.

The Fed staff briefed Fed members on the roles of forward guidance and large-scale asset purchases (LSAPs) in achieving its dual employment and inflation mandates, and how yield curve caps or targets (YCT) would complement these policies:

Forward guidance - A number of Fed members seemed to be in favor of forward guidance tied to inflation outcomes that included a modest temporary overshoot of its 2% inflation target. This would support its “symmetric 2% inflation objective” and delay an unwinding of its accommodative monetary policy. Only a couple of participants indicated a preference for forward guidance timed to the unemployment rate. A few others supported a calendar-based guidance for raising the policy rate. We note that in the recovery and expansion following the financial crisis of 2008-2009, the Fed fumbled around without an exit strategy and established a series of forward guidelines, only to shift gears and change them. The Fed initially relied on a date-based forward guidance and then shifted and announced tying its policy rate increase to the unemployment rate target (the so-called “Evans Rule”). It dropped the rule almost two years before raising rates.

LSAPs - Fed members generally agreed that LSAPs put downward pressure on term premiums and longer-term yields. Several members questioned the effectiveness of such programs now given the declines in the neutral rate of interest and term premiums over the last decade, and a few members questioned the benefit of continued LSAPs given the large purchases the Fed has already undertaken to smooth market functioning, and cited financial stability concerns. Most Fed members agreed that the Committee should provide more information on its intentions for LSAPs as more data on the outlook for the economy become available. This is important with the policy rate anchored to zero.

Yield curve caps or targets - YCT policies are off the table, at least in the near term, with Fed members uncertain about their costs and benefits. Concerns included: (1) how the Fed would maintain control of the size and composition of its balance sheet, (2) how to mitigate risks that YCT policies would pose to central bank independence, (3) and how to determine the effect of these polices on financial market functioning and private sector balance sheets. We expect that the Fed would seriously consider YCT only if economic conditions deteriorate significantly or if there is an undesirable spike in bond yields.

Importantly, the June 9-10 meeting pre-dated the release of economic data that indicate a sharper-than-expected initial rebound in activity. At the quarterly June meeting, the median Fed member expected a 6.5% decline in 2020 real GDP (Q4/Q4), 13 Fed members assessed risks to real GDP growth as weighted to the downside and only one assessed risks as being to the upside. That perception has changed. Fed Chair Powell offered a slightly more optimistic assessment yesterday in his testimony before the House Financial Services Committee, stating that “we have entered an important new phase and have done so sooner than expected,” while at the same time emphasizing the high degree of uncertainty in the outlook (Fed Chair Powell and Treasury Secretary Mnuchin emphasize ongoing expansive policy support, June 30, 2020). In the minutes, Fed members highlighted the uneven economic impacts on lower-wage households, women, and minorities, a theme that drew attention at the Congressional testimony.

Fed members agreed that their actions have improved market functioning and supported the flow of credit to households, businesses, and communities, and that borrowing at many of its short-term liquidity facilities had receded as borrowers returned to market sources of funding. Since the Fed instituted these programs in early March, its balance sheet has increased to $7.0tn from $4.1tn.

Mickey Levy, mickey.levy@berenberg-us.com

Roiana Reid, roiana.reid@berenberg-us.com

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