Fed signals quicker exit on stimulus

This Sept. 18, 2013 file photo shows the Federal Reserve headquarters in Washington. Minutes of the Fed's discussion at its July 29-30, 2014 meeting show that some officials thought the economy was improving enough that the Fed would need "to call for a relatively prompt move" toward reducing the support it has been providing. Otherwise, they felt the Fed risked overshooting its targets for unemployment and inflation.
This Sept. 18, 2013 file photo shows the Federal Reserve headquarters in Washington. Minutes of the Fed's discussion at its July 29-30, 2014 meeting show that some officials thought the economy was improving enough that the Fed would need "to call for a relatively prompt move" toward reducing the support it has been providing. Otherwise, they felt the Fed risked overshooting its targets for unemployment and inflation.

Federal Reserve officials raised the possibility that they might begin removing aggressive stimulus sooner than anticipated, as they neared agreement on an exit strategy, according to minutes of their July meeting released Wednesday.

"Many participants noted that if convergence toward the committee's objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated," the minutes said.

Fed Chairman Janet Yellen has committed monetary policy to stronger labor markets, which she measures with an array of indicators, so long as inflation remains in check. The minutes said "many participants" still see "a larger gap between current labor market conditions and those consistent with their assessments of normal levels of labor utilization."

In their post-meeting statement last month, Fed officials downplayed recent declines in the unemployment rate, highlighting "significant underutilization of labor resources."

Still, the minutes showed policymakers anticipating further labor-market strength.

"Many members noted, however, that the characterization of labor market underutilization might have to change before long, particularly if progress in the labor market continued to be faster than anticipated," the minutes said.

Fed officials, discussing their strategy for eventual "normalization" of policy, expressed a desire to keep the federal funds rate as the key policy rate, targeting a range of 25 basis points "at the time of liftoff and for some time thereafter," according to the minutes.

They would use the rate of interest on excess reserves as the "primary tool used to move the federal funds rate into its target range" while "temporary use" of its reverse repurchase facility, which it uses to borrow cash overnight from money-market mutual funds and others, would help set the floor.

However, Fed officials "generally agreed" that the reverse repurchase facility should be "phased out when it is no longer needed for that purpose," and that the balance sheet "should be reduced to the smallest level consistent with efficient implementation of monetary policy and should consist primarily of Treasury securities in order to minimize the effect" of the Fed's portfolio holdings on credit allocation across different sectors of the economy.

Most participants advocated continuing to reinvest maturing bonds until sometime after the first increase in the federal funds rate, while some said "it could be helpful to retain the option to sell some assets" instead of letting them run off the balance sheet as they mature.

There was no discussion of the timing of a rate increase in the minutes. Fed officials have forecast that it would occur next year. The central bank has kept its benchmark rate near zero since December 2008.

Yellen will speak on labor markets Friday at the Kansas City Fed's annual economic symposium at Jackson Hole, Wyo.

The Federal Open Market Committee in July continued cutting the monthly pace of asset purchases, reducing it by $10 billion for a sixth-straight meeting, to $25 billion. Bond buying has boosted the central bank's balance sheet to a record $4.43 trillion.

Weak wage growth and low inflation have given the Fed room to keep interest rates near zero to bolster further progress in the labor market. Average hourly earnings rose 2 percent in July from the year before, matching the mean increase over the past five years and down from 3.1 percent in the year ended December 2007, Labor Department data showed in the latest employment report.

Business on 08/21/2014

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