The FOMC minutes for the June meeting revealed that the members had rigorous discussion about forward guidance, asset purchases and yield curve caps/targets. We expect the framework review will be completed this month, allowing the Fed to announce changes in forward guidance and the asset purchase program at the September meeting. It appears that many members were still skeptical about adoption of yield curve caps/targets, although a number of them showed favor in the Australian model.

Evidenced in the sharp downgrades in economic assessments (released in June), the Fed was concerned about the economic outlook, which has been hammered by the coronavirus pandemic. The minutes also suggested that while real GDP could improve and unemployment rate could decline considerably in 2H20, a “complete recovery was not expected by year-end”. They also projected inflation to weaken this year. As such, the members judged that the expansionary monetary measures would have to stay in place. The members had discussions on forward guidance, asset purchases and yield curve caps/targets at the June meeting. They indicated that it is “important in coming months for the Committee to provide greater clarity regarding the likely path of the federal funds rate and asset purchases”.

Concerning forward guidance, the members were generally supportive of and outcome-based one. As suggested in the minutes, “a number of participants spoke favorably of forward guidance tied to inflation outcomes that could possibly entail a modest temporary overshooting of the Committee’s longer-run inflation goal but where inflation fluctuations would be centered on 2% over time.” Meanwhile, “a couple” proposed to link forward guidance to the unemployment rate. However, “a few” of them continued to view that a calendar-based guidance could be equally effective.

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On asset purchases, the members were generally convinced by its effectiveness on promoting accommodative financial conditions. The minutes noted that “several” participants admitted that the effects of the program could be smaller today, compared with the previous recession, due to the decline in interest rates and term premiums in particular. Yet, they still anticipated beneficial effects under current circumstances. Meanwhile, “a few” members were doubtful of extending asset purchases beyond the current purchases to support market functioning.

The members had rigorous discussions about the pros and cons of yield curve caps/targets. They generally believed that the Australian model is most relevant to US’ current situation. RBA announced yield curve control (YCC) on March 19, setting a 0.25% target on 3-year government bond. Nonetheless, “a couple” of the members were concerned that the program would prevent market expectations about liftoff from changing prematurely. Many were skeptical about the use of yield curve caps/targets and forward guidance simultaneously. They believed that the former might not be needed of the latter remained credible.

As the Fed has pledged to provide more clarity about its monetary policy outlook in coming months, we expect the framework review could finish by this month. Announcement to changes in forward guidance and asset purchase program would be made at the September meeting, together with latest economic assessments and median dot plot.

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