Wednesday’s release of the minutes from the January Federal Reserve meeting was one of the most anticipated ever. The wait proved worthwhile as the minutes did not only help explain historic Fed decisions (which was surely needed given the scale and scope of recent policy innovations). They also shed light on the future of its balance sheet operations and some of the challenges that its unusual policy activism faces in this fluid economic and political environment.
The central bank made history in a number of ways last month. It took transparency to a new level by publishing the policy rate forecasts of the individuals serving on the Federal Open Market Committee, and told us their expectations regarding the next rate hike. In addition, the FOMC members signalled that, collectively, they expected interest rates to remain “exceptionally low” (defined as under one per cent) all the way out to the end of 2014, if not beyond.
Each of these steps would have been deemed unthinkable not so long ago. Together they constituted a major historical evolution in how far this central bank is willing to go in its attempts to influence economic outcomes at a time when its rates are floored and its balance sheet has already expanded to an astounding 20 per cent of gross domestic product. Thus there is great interest in the official thinking underpinning all this.
Given the various views expressed in the minutes (ranging from “almost all” participants to “one” member, with lots of “several,” “some” and “a few” in between), this is clearly a group with diverse opinions. It tries hard to reach a consensus that, most likely, is heavily influenced by chairman Ben Bernanke himself.
It is difficult to avoid the impression that members are navigating, to use some Bernankisms, an “unusually uncertain” outlook with a less than robust assessment of the balance of “benefits, costs and risks”. They are also having to use imperfect policy tools.
Based on the information available to them, they did not wish to infer too much optimism from the recent improvement in US economic data. Indeed, and despite the inevitable uncertainties that accompany unusual policy activism, they seem inclined to do even more.
A few FOMC members already see a need for QE3 or “the initiation of additional securities purchases before long”. Others would go along with this if the economy were again to lose momentum or if inflation remains well behaved. The majority is keen to be even more transparent, with several seemingly interest in providing numerical inflation and unemployment thresholds that would govern the timing of future policy moves.
You should have no doubt. Wednesday’s minutes confirm that the Fed remains one of the most activist, imaginative and audacious central banks in the world. Motivated by the uncertain economic outlook and the reticence of other policymakers who are much better placed to remove impediments to growth and job creation, it feels compelled to do even more to boost the US economy. Yet its ability to deliver good outcomes is tempered by the fact that it is experimenting, deploying untested tools with inadequate support from other policymakers.
The bad news is that we will not know for a while whether the Fed’s unusual activism will work. However, when the time finally comes – and here is the good news – historians will have an unusual amount of information to understand the content in which innovations and important decisions were made.
The writer is the chief executive and co-chief investment officer of Pimco