Fed Worried About Triggering Another ‘Taper Tantrum’Christopher Condon and Jeff Kearns
Federal Reserve officials meeting last month worried that changing their commitment to keep interest rates low for a “considerable time” would shake financial markets, minutes of the gathering show.
“Changes to the forward guidance might be misinterpreted as a signal of a fundamental shift in the stance of policy that could result in an unintended tightening of financial conditions,” according to a record of the Federal Open Market Committee meeting on Sept. 16-17 released today.
Officials opted instead to let their statement “evolve” at an undisclosed pace. Analysts said that although the minutes shed little light on when forward guidance would change, it was clear that officials wanted to avoid repeating missteps from last year.
“This likely reflects the scars from the ‘taper tantrum’ last summer,” when then-Fed Chair Ben Bernanke signaled that asset purchases might be scaled back sooner than investors expected, according to a note to clients from Bank of America Corp. Bernanke’s comments caused a jump in Treasury yields.
Fed officials last month questioned the signal their pledge was sending, and Dallas Fed President Richard Fisher and Philadelphia’s Charles Plosser dissented over the statement.
The meeting explored options on how to replace the forward guidance, including a numerical threshold based on the inflation outlook, as well as relying on quarterly Fed projections for the future path of the benchmark funds rate.
This debate yielded no conclusions on how the Fed would proceed, apart from acknowledging it would be a tricky process.
“It was generally agreed that when changes to the forward guidance become appropriate, they will likely present communication challenges, and that caution will be needed to avoid sending unintended signals about the Committee’s policy outlook,” the Fed said. Analysts agreed.
“A lot of that discussion was just as clear as mud,” said Paul Ashworth, chief U.S. economist at Capital Economics NA in Toronto. “There’s clearly some urgency to change that. But you’d like a hint about what they’re thinking about.”
Officials said their language “might evolve once the Committee decides that the current formulation no longer appropriately conveys its intentions.”
This evolution would clarify the dependence of forward guidance on incoming information from the economy, the Fed said, echoing Fed Chair Janet Yellen’s comments in a Sept. 17 press conference that policy was data-dependent.
“A number of alternatives were apparently discussed to the current language, but no one was able to come up with anything that garnered widespread support,” Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, wrote in a note to clients. “In the end, the Committee went for the ‘‘if it ain’t broke, don’t fix it” strategy.’’