The Fed's April 29-30 policy meeting had no surprises. The minutes released today focused on the path for normalizing monetary policy. This was seen as prudent planning. The meeting also gave more attention to how guidance should be used. Early communication was seen as providing clarity to markets and giving the Fed more credibility. Some participants want to give more information on how long the Fed should continue reinvestment of pay down on Fed assets.
Clearly, the focus of the latest meeting was for planning exit strategy.
"Following the staff presentation (of various options for unwinding), meeting participants discussed a wide range of topics related to policy normalization. Participants generally agreed that starting to consider the options for normalization at this meeting was prudent, as it would help the Committee to make decisions about approaches to policy normalization and to communicate its plans to the public well before the first steps in normalizing policy become appropriate. Early communication, in turn, would enhance the clarity and credibility of monetary policy and help promote the achievement of the Committee's statutory objectives. It was emphasized that the tools available to the Committee will allow it to reduce policy accommodation when doing so becomes appropriate. Participants considered how various combinations of tools could have different implications for the degree of control over short-term interest rates, for the Federal Reserve's balance sheet and remittances to the Treasury, for the functioning of the federal funds market, and for financial stability in both normal times and in periods of stress."
Regarding the economy, the Fed expects a pickup in growth. First quarter softness was attributed as weather related.
"However, the staff's assessment was that the unanticipated weakness in economic activity in the first quarter would be largely transitory and implied little revision to its projection for second-quarter output growth. In addition, the medium-term forecast for real GDP growth was essentially unrevised. The staff continued to project that real GDP would expand at a faster pace over the next few years than it did last year, and that it would rise more quickly than the growth rate of potential output."
The Fed sees inflation as remaining below goal (2 percent PCE inflation) for the next few years and slack in labor markets is expected to continue, indicating likely low policy rates. Risks to the forecast for real GDP growth were viewed as tilted a little to the downside, especially because the economy was not well positioned to withstand adverse shocks while the target for the federal funds rate was at its effective lower bound.
Overall, the minutes indicate that taper is still on but the level of the balance sheet will likely come down slowly. Also, policy rates are likely to rise slowly and it will take a few years for monetary policy to return to normal.