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FOMC Minutes Revealed Rigorous Debate over Alternative Monetary Policy Tools

The FOMC minutes for the July meeting revealed that the members remained concerned about the outlook of economic recovery. They had discussed a number of tools for further easing, including forward guidance, asset purchases, and yield curve targets. Meanwhile, the members again stressed that fiscal support is particularly important in supporting businesses and families amidst the current crisis.

Uncertainty Remains Extremely Elevated

On the economic outlook, the Fed warned that the uncertainty of the economic outlook remained “extremely elevated”, adding that “projected rate of recovery in real GDP, and the pace of declines in the unemployment rate, over the second half of this year were expected to be somewhat less robust than in the previous forecast”. Some high frequency indicators had “pointed to a deceleration in economic activity” as many states have scaled back reopening plans as a result of the resurgence of the virus. Policymakers noted that “the negative effect of the pandemic on aggregate demand was more than offsetting upward pressures on some prices stemming from supply constraints or from higher demand for certain products, so that the overall effect of the pandemic on prices was seen as disinflationary”. Indeed, the members agreed that inflation “would likely continue to run well below the Committee’s +2% objective for some time”.

More Easing will Required but Fiscal Support Most Important

Against this backdrop, “several participants suggested that additional accommodation could be required”. On QE, members reiterated the stance that “over coming months it would be appropriate for the Federal Reserve to increase its holdings of Treasury securities and agency RMBS and CMBS at least at the current pace to sustain smooth market functioning”. The members discussed a range of alternative tools to stimulus the economy. On forward guidance of the policy rate, a “number” of participants acknowledged that more clarity on the policy rate path would be “appropriate at some point”. They discussed about both outcome-based and calendar-based forward guidance. For the former, it would be in the form that the Fed would “maintain the current target range for the federal funds rate at least until one or more specified economic outcomes was achieved”. According to the minutes, the first rate hike would be linked to “thresholds calibrated to inflation outcomes, unemployment rate outcomes, or combinations of the two”. For the latter, the forward guidance could suggest that the policy rate will remain unchanged at least until a particular calendar date. It is also possible that the forward guidance would be an outcome-based one combined with calendar-based. Yet, we believe the members are more inclined to outcome-based only.

On yield curve targeting, while “many” participants judged that they should remain an option, “most” noted that this “would likely provide only modest benefits in the current environment”. They were concerned about the “the possibility of an excessively rapid expansion of the balance sheet and difficulties in the design and communication of the conditions under which such a policy would be terminated”. We believe the interest in this tool remains limited amongst the majority of the members.

Notwithstanding rigorous discussion about additional monetary easing measures, the members stressed the crucial role of fiscal support. They suggested that fiscal stimulus, particularly from the CARES Act, has been “very important in granting financial relief to millions of families”. Policymakers called more more support from the fiscal front as some provisions in the CARES Act are expiring.

Monetary Policy Strategy Review to be Released in as Soon as September

We expect the Monetary Policy Strategy review to be released soon (probably in September. As noted in the minutes, “refining the statement could be helpful in increasing the transparency and accountability of monetary policy” and it was “important to finalize all changes to the statement in the near future”.

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