Investors probably read more into the newly released U.S. Fed minutes of its October meeting than policymakers would have liked. Stock gains were pared and bond yields spiked. In truth, the minutes revealed nothing new about the timing of the central bank’s withdrawal of its stimulus. Tapering of its $85 billion-a-month asset buying program in the coming months if the U.S. economy is strong enough to stand it has been its line for some time. The desire of many of its members to start the process shines through, but that, too, is scarcely news.
The market reaction does, though, underline why the policymakers’ discussion was so lengthy on how to distinguish between the policies of asset buying and forward interest rate guidance. It is a distinction that is perfectly clear in the minds of policymakers, but conflated in investors’. Reducing the interest rate the Fed pays to banks on their reserves held at the bank was one option considered to reinforce the point that easy monetary policy would continue even after asset purchases slow. Lowering the 6.5% unemployment threshold and adding an inflation threshold were also discussed but supported with no very great enthusiasm not least because neither would do much if anything to strengthen the credibility of the Fed’s forward guidance.
Outgoing Fed Chairman Ben Bernanke said earlier this week that interest rates are likely to stay low “for a considerable time after the asset purchases end” and “perhaps well after the unemployment threshold is crossed.” That is about as plainspoken as a central banker gets. His vice-chair and likely successor Janet Yellen has echoed the same message. It is slightly disconcerting that policymakers are having to spend as much time on looking for ways to stress that message as they are on the substance of ensuring they start to exit quantitative easing neither too soon, too fast or too slowly.