Fed Minutes Include Member Views on When to End Bond Purchases

Minutes from the Federal Reserve's March meeting showed that some members of the Federal Open Market Committee (FOMC) were, at least at that point, favoring tapering off bond purchases sooner than later. Since then, we had a disappointing payroll report, showing that the number of new jobs created in March was just 88,000, vs. expectations of a gain of 190,000. Because the Fed's bond-buying actions are predicated on a “substantial improvement” in the labor markets as long as inflation remains tame, investors might think the Fed could continue their bond purchases for longer than if we had a stronger payroll report. However, what does the Fed mean by “substantial improvement,” and is that even captured by a single number? The answer is that the Fed states it uses a variety of economic data points in its assessment of the labor markets. One of them is the number of job openings, and we received Tuesday the Job Openings and Labor Turnover Survey (or JOLTS report, as it is commonly known), and that report indicated the highest number of new job openings since May 2008. Specifically, the number of jobs posted by companies increased to 3.9 million in February from 3.6 million in January. Since it often takes a month or two (or even longer in the current environment) to fill an open position, it may turn out that the March payroll report was an aberration, and not the start of a new trend of weaker employment. Even going into the meeting March 19th to the 20th, members of the FOMC did not all have a high degree of confidence as to whether the progress in the labor markets in previous months would be sustained, as we learned in the minutes. The bulk of their comments indicated ongoing concern for the labor markets, including the issue of high long-term unemployment and the falling labor force participation rate. On balance, though, they generally believe that “growth would proceed at a moderate pace and that the unemployment rate would decline gradually.” With the knowledge that some Fed members already had an elevated degree of caution for the labor markets, some members nonetheless believed that asset purchases could be slowed mid-year. Members generally thought the benefits of the bond purchases outweighed the risks, though Esther George of the Kansas City Fed dissented, citing risks of market dislocations. Specifically, we learn in the minutes that:

Whenever the Fed might taper, and later end, its bond purchase program, it will likely be well before policy is tightened and the Fed funds rate is increased. Minutes of the meeting suggested that some securities, particularly mortgage paper, could be held until maturity to avoid a large increase in rates. It is also possible for the Fed to increase the interest rate it pays on banks' excess reserves that are parked at the Fed, with the goal of keeping banks from lending those funds out, which could be inflationary. In any event, between now and the next Fed meeting April 30 to May 1, we will not have another payroll report, although we will receive a number of other economic indicators, including the advance report on first quarter GDP. Thus, meetings later this summer, following additional labor market data, may be of greater import to assessing the direction of policy changes.