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The FOMC releases the minutes of its October meeting at 2 PM ET.While the Fed announced open-ended quantitative easing (QE3) back in September, there are still several unanswered questions about the future course of current Fed policy.
The biggest among them: now that the Fed has committed to open-ended quantitative easing to battle unemployment, will they specify exactly what unemployment rate they need to see before ending the program?
Several Fed officials have come out in favour of this since the October meeting, including dovish Chicago Fed President Charles Evans, Dallas Fed President Richard Fisher, and Federal Reserve Vice Chairman Janet Yellen, just yesterday.
Whether it becomes official policy remains to be seen, but everyone is talking about it. Below are some comments from Wall Street economists in recent notes to clients.
BofA Merrill Lynch economist Ethan Harris and team:
We also look for a lengthy discussion of what should replace the calendar guidance on interest rates; we expect a robust debate on the pros and cons of various proposals, such as numerical “thresholds.”
We also look for the results of the second experiment with reporting a consensus forecast for the FOMC. There is a significant chance that this will be unveiled at the December FOMC meeting as part of an updated Summary of Economic Projections, in our view.
Deutsche Bank macro strategist Jim Reid:
Ahead of today’s FOMC minutes, Fed vice-chair Janet Yellen commented that the Fed is considering tying Fed policy to inflation and unemployment targets. Yellen added that the Fed has a target jobless rate range of 5.2% to 6% and that employment targeting may mean that the Fed will tolerate a temporary deviation from inflation ranges. If such a policy comes to pass this is quite a big deal and would need even more money creation.
Deustche Bank U.S. economist Joe LaVorgna:
This afternoon’s FOMC minutes should provide us with important clues as to what the Fed is thinking with respect to what happens after “operation twist” expires next month. We are assuming the minutes will hint of the FOMC’s intention to announce open-ended Treasury purchases totaling roughly $45 billion per month in longer-dated securities, essentially replacing the duration impact of twist.
We expect the minutes to further discuss numerical targets as an eventual policy guidepost because some members remain uncomfortable with a calendar commitment- i.e. “exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.” Numerical targets would be something akin to the Evan’s Rule, the Chicago Fed President, who has said that as long as core inflation is under 3%, the Fed should not raise interest rates until the unemployment rate falls below 7%.
Chairman Bernanke has been non-committal. He said at the September post-FOMC press conference that “There’s not a specific number we have in mind…What we have seen the last six months isn’t it.” Consequently, we do not expect numerical targets at this point.
Citi economist Robert DiClemente:
The minutes may also shed light on further progress on the issue of “numerical thresholds” for labour markets and inflation. Many participants viewed a shift in this direction as preferable to calendar-based guidance in part to counter concerns that extending the timeframe for low rates can fuel pessimism and thereby have negative effects on financial conditions that run counter to policy intentions.
Nonetheless, the puzzling combination of rapid declines in unemployment and modest job gains complicates how they might frame more explicit labour market guidance and this discussion may not be resolved at their next meeting.
We will have the FOMC minutes here at 2:00 PM ET. Follow the release LIVE on Money Game >
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