Fed Minutes Detail Discussions On Forward Guidance, Yield Curve Control
With interest rates expected to remain at near-zero levels for the foreseeable future, the minutes of the Federal Reserve’s June meeting showed participants discussed new tools for conducting monetary policy.
The minutes showed the meeting included briefings on the roles of forward guidance and large-scale asset purchase programs as well as implementing yield curve control.
In their discussion of forward guidance and large-scale asset purchases, various participants noted the economy is likely to need support for some time and that it will be important for the Fed to provide greater clarity regarding the likely path of interest rates and asset purchases.
Participants generally indicated support for outcome-based forward guidance, the minutes said, with a number speaking favorably about guidance tied to inflation outcomes.
Meanwhile, a couple of participants signaled a preference for forward guidance tied to the unemployment rate and a few others suggested calendar-based guidance.
“Regardless of the specific form of forward guidance, a couple of participants expressed the concern that policies that effectively committed the Committee to maintaining very low interest rates for a long time could ultimately pose significant risks to financial stability,” the minutes said.
With regard to potential yield curve control, the minutes said nearly all participants indicated they had “many questions regarding the costs and benefits of such an approach.”
Many participants expressed that, as long as the Fed’s forward guidance remained credible, it was not necessary for the central bank to adopt a yield caps or targets policy.
Andrew Hunter, Senior U.S. Economist at Capital Economics, said the minutes suggest “the Fed is still a long way from rolling out explicit targets for longer-term Treasury yields.”
While recent data has pointed to some stabilization by the economy following the coronavirus-induced downturn, participants noted there continues to be an extraordinary amount of uncertainty and considerable risks to the economic outlook.
“A number of participants judged that there was a substantial likelihood of additional waves of outbreaks, which, in some scenarios, could result in further economic disruptions and possibly a protracted period of reduced economic activity,” the minutes said.
Participants subsequently reaffirmed that the Fed was committed to using its full range of tools to support the U.S. economy in this challenging time.
The Fed voted unanimously to maintain the target for the federal funds rate at zero to 0.25 percent and indicated rates would remain at current levels until policymakers were confident that the economy had weathered recent.
Economic projections submitted at the meeting showed most Fed officials expect rates to remain at current levels through 2022, with only a couple predicting an increase in rates.
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