The Federal Reserve appears to be sticking to its game plan to continue winding down its program of stimulating the economy through monthly asset purchases. Minutes released from the Jan. 28-29 Fed meeting indicate officials were generally surprised by the strength of the economy in the second half of last year.
"It sure sounds like they feel like the fundamentals are pretty darn solid," says economist Gus Faucher with PNC Financial Services Group.
Easing off in 'measured steps'
At the meeting, policymakers decided to reduce asset purchases by $10 billion, to $65 billion, and it appears likely that further reductions are on tap in coming months. "Members again judged that, if the economy continued to develop as anticipated, further reductions would be undertaken in measured steps," according to the minutes.
The unemployment rate has since been reported to have dropped to 6.6 percent. That's close to the out-of-the-woods threshold of 6.5 percent that has been eyed by the Fed for some time, though the meeting notes state that the Federal Open Market Committee, or FOMC, has decided to leave short-term interest rates at record-low levels "well past the time" joblessness dips below 6.5 percent.
The minutes indicate that policymakers agreed the time would soon be right to issue some new guidance about rates, though it appears there wasn't agreement on what that guidance should be. Economist Faucher says the officials could ultimately decide to drop their threshold to 6 percent while also providing more transparency into what will factor into their decision-making on interest rates. That will likely include further mention of their concerns about abnormally low inflation, Faucher says.
The Labor Department will release the next set of jobs numbers well before the March 18-19 FOMC meeting. If the jobless rate slips further by then, the threshold issue will be additionally pressing.
What if things get worse?
Several recent economic reports, including numbers on hiring, have looked anemic. But the minutes indicate that Fed officials are taking those indicators in stride, chalking them up to weather woes.
"A number of participants indicated that the December payrolls figure may have been an anomaly, perhaps importantly reflecting bad weather," the minutes state. Furthermore, FOMC members note the tendency in recent years to revise payroll numbers higher.
Reflecting comments made by Fed Chair Janet Yellen in her recent congressional testimony, some of the policymakers said at the meeting that "if the economy deviated substantially from its expected path," the pace of pulling back on asset purchases might need to be reconsidered.
Trouble in some emerging markets before the January meeting was acknowledged in the minutes. A number of officials said if it were to continue, it "could pose downside risks to the outlook."
What do you think? Is the Fed too optimistic about the economy?
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