The minutes from the latest U.S. Federal Open Market Committee (FOMC) meeting show a growing confidence in the recovery and less fear that the market would expect higher rates if bond buying is reduced.
The minutes of the December 17-18 FOMC meeting were released today. At that meeting, the Fed indicated its plans for curtailing extraordinary monetary policy measures, but stressed that rates would not be heading higher any time soon.
TD Economics says that the minutes reveal “a growing confidence in the economic outlook among members and a broad expectation for stronger growth as fiscal restraint diminishes, but some concerns over inflation remaining under target.”
It notes that the committee’s decision to taper its bond buying was based largely on improvements in the labour market, and expectations that this improvement will continue. TD says that consumer spending was also cited as a particular bright spot in the economic outlook.
“The Fed’s tapering decision while largely determined by the spate of positive economic data and growing confidence in the economic outlook also appeared to be influenced by a growing satisfaction among FOMC participants that tapering would not signal an earlier withdrawal of monetary stimulus,” TD says.
It reports that the minutes devote roughly equal space to the arguments of both hawks and doves on monetary policy. “The main hawkish case for a faster reduction in asset purchases is based on the potential consequences of monetary policy for financial stability coupled with an uncertainty about the underlying potential growth of the U.S. economy. The dovish case is based on uncertainty about economic growth exceeding potential and the continued weakness in inflation,” TD says. “It goes without saying that the evolution of these factors will determine how quickly the Yellen Fed normalizes monetary policy.”
Since that December FOMC meeting, the economic data has continued to come in on the positive side, TD observes, adding, “Continued positive economic surprises pose a challenge to the Fed. Keeping a lid on long term yields will require the Fed to convince financial markets that it is determined to leave accommodation in place even in an environment of above-potential growth.”