January 10, 2014

FOMC minutes: Low fed funds rate for a while

The Federal Open Market Committee's target rate for federal funds – 0 to 0.25 percent – could remain in place well past the time unemployment reaches the Fed's stated benchmark of 6.5 percent, according to minutes from last month's policy setting session.

After a two-day meeting, the FOMC announced Dec. 18 that the Fed would reduce its monthly asset purchases to about $75 billion, down from $85 billion, and that it would leave the fed funds target rate at the current range for now.

Meeting minutes show committee members generally agreed they wanted to keep fed funds low for a while longer. One idea was to revise the unemployment benchmark down to 6 percent. Another was to say the fed funds target would remain low as long as projected inflation continues to run below the Fed's long-term benchmark for unemployment.

The final statement is clear without being date-specific. In its Dec. 18 policy statement, the FOMC said "it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal."

During the December meeting, FOMC members noted that the markets also expect rates will not rise for some time.

As for asset purchases, the minutes show the committee was divided in its decision on when and how much to taper. While economic growth did a little better than expected in the second half of last year, several participants were less confident in the economic recovery and worried about cutting asset purchases while inflation is running well below the committee's target.

Ultimately, the decision to reduce asset purchases was motivated by the most recent 15 months of labor market data, which showed unemployment "had fallen more quickly over that period than [FOMC] had expected."