Fed Minutes: The Taper Debate Is On and Focused On Jobs
The U.S. Federal Reserve released the minutes of the December 17-18 meeting on Wednesday, and they reveal that the taper debate is in full swing at the nation’s central bank. The effectiveness of the Federal Reserve’s highly accommodating monetary policy has diminished, and policymakers know this. Monetary stimulus has evolved from being the medicine that helped financial markets and the broader economy get through the crisis to a drug. It now appears to service an unproductive addiction to easy money more than the favorable dynamic of job creation, rising income, and increased spending that Fed Vice Chair Janet Yellen spoke about in her recent testimony before the Senate Banking Committee.
For this reason, and because the economy is soldering through a slow but real recovery, the Federal open Market Committee announced at the conclusion of its December meeting that it would reduce the flow rate of assets being purchases for quantitative easing. Policy makers also dropped the floor on the unemployment component of its forward guidance, stating that, “It likely will be appropriate to maintain the current target for the federal funds rate,” which is at a range between 0 and 0.25 percent, ”well past the time that the unemployment rate declines below 6-1/2 percent.”
The taper — which reduced asset purchases from $85 billion to $75 billion per month — was widely expected, but the edit to the unemployment target was more of a surprise. Where the taper means a lower dose of stimulus for beleaguered markets, the more flexible target reassured market participants that the Fed would be careful not to withdraw support too quickly.