FOMC Minutes

FOMC minutes from the June 21-22 meeting are posted here. There are a few interesting things in there. First, there is a discussion, continued from the previous meeting, on the exit strategy. Basically, the FOMC plans to first stop reinvesting principal payments on the securities it holds, and will then begin increasing the fed funds target rate. Mortgage-backed securities (MBS) and agency securities will then be sold off over a three-to-five-year period. The minutes say:

In particular, the size of the securities portfolio and the associated quantity of bank reserves are expected to be reduced to the smallest levels that would be consistent with the efficient implementation of monetary policy.

That's vague, but I take it to mean that, after three to five years, excess reserves will be zero.

There is a bit of funny stuff:

When economic conditions warrant, the Committee's next step in the process of policy normalization will be to begin raising its target for the federal funds rate, and from that point on, changing the level or range of the federal funds rate target will be the primary means of adjusting the stance of monetary policy. During the normalization process, adjustments to the interest rate on excess reserves and to the level of reserves in the banking system will be used to bring the funds rate toward its target.

The truth of the matter is that, over the period discussed here, where excess reserves are positive, the FOMC actually has no control over the fed funds rate, as that is determined by the interest rate on reserves (IROR), which is set by the Board of Governors. Further, in this regime, "adjustments...to the level of reserves" are irrelevant for the fed funds rate.

On the current policy stance, there seems to be a divergence of opinion on the committee:

On the one hand, a few members noted that, depending on how economic conditions evolve, the Committee might have to consider providing additional monetary policy stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run. On the other hand, a few members viewed the increase in inflation risks as suggesting that economic conditions might well evolve in a way that would warrant the Committee taking steps to begin removing policy accommodation sooner than currently anticipated.

Thus, some people on the FOMC think that we should be considering QE3. Obviously, they think QE2 worked, which I think is incorrect. Others are actually more worried about inflation than at the last meeting, and think that the Fed will have to start executing its exit strategy sooner rather than later.

Here's another interesting tidbit:

In the discussion of inflation in the statement, members decided to reference inflation--meaning overall inflation--rather than underlying inflation or inflation trends, in order to be clear that the Committee's objective is the level of overall inflation in the medium term.

Thus, the FOMC wants it to be known that it cares about headline inflation, not core inflation.