Tuesday, October 28, 2014

FOMC Report - October 28-29, 2014; 'Taper-Tantrum to Successful Policy-Path Guidance'

Taper-Tantrum to Successful Policy-Path Guidance

Executive Summary

Recent market volatility in fixed income, equities, commodities and foreign exchange is largely the result of greater uncertainty surrounding the path for monetary policy, a situation that will not soon change.  A reduction in usable (visibility-aiding) Fed forward guidance accompanies the transition from ‘time’ to ‘data-dependent’ policy guidance.  Similar bouts of volatility are possible and even likely until a greater sense of confidence surrounds the timing of the first policy rate increase and its aftermath.     

The Fed will announce the end of the securities purchase program (QE3) as initially outlined at the December 2013 FOMC meeting.  The ‘considerable time’ language will remain without value adjustments. There is room for a slight and conditioned upgrade in the employment situation and an acknowledgement of moderation in inflationary pressures.  However, if these modest amendments are offered in the statement, they will be referenced such that no policy adjustment is implied.  Finally, and without consequence, the statement may note recent weaker global growth, reduction in energy prices or the recent market gyration.   

Current Eurodollar, Treasury and Fed Fund futures prices and their implied projections for an initial policy rate move in late 2015 as well as current market participant positioning, suggests the risk is for higher yields and for the statement to imply a less dovish Fed policy intent than currently priced in the market.    

Volatility and Visibility

Economic agents have become accustomed to a greater level of time-dependent policy guidance.  The recent spike in market volatility is an expected outgrowth of the reduction in visibility along the monetary policy prescription timeline.  While data dependency has forever been at the core of Fed policy intent, the construction of guidance, using calendar reference has heightened the confidence of economic agents for their forecasts on interest rates and other policy variable levels. 

The Fed has offered numerous ‘promises’ to maintain policy accommodation for specific periods or dates in the future.  The oldest and still valid time reference guidance was made in the September 2012 FOMC statement; ‘In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.’  So far, this statement has given accurate and visible guidance for more than 2 of its projected 2.75 years of Fed monetary policy timeline.  It is difficult to calculate the value of this support.  Its ongoing support however, aside from its creditability enhancement is certainly worth less today than it was in late 2012.         

Additionally, guidance afforded by the timely regular reduction and elimination of the securities purchase program known as QE3 is also coming to an end.  This program initiated as open-ended starting with agency mortgage-backed mortgage securities, advanced to include treasury purchases.  It is widely believed, despite St. Louis Fed President Bullard’s urging otherwise, the Fed will conclude the program with an announcement at this meeting.  The Fed has no good reason to disappoint in this regard. Some economists have not embraced the notion of the tapering of securities purchases as guidance even though they used this Feds guidance on the path for scaling the purchases in their macroeconomic forecasting models.       

Though the reduction in securities purchases from a level of $85 billion per month, begun in January 2014 resulted in gradually lesser amounts of additional stimulus provided, the known ‘policy-path’ timeline advance of those adjustments aided economic agents in their ability to project Treasury and spread rates based on that schedule.  To that extent therefore, the guidance provided by the stated intent of scheduled, discrete and calculable changes in the Feds securities purchase plans provided additional visibility along the Feds policy timeline. 

A much anticipated approach of the transition from increasing to decreasing levels of accommodation has begun.  The transition does not allow for the kind of Fed timeline guidance that provided support while policy goals were further from reach.  Timeline references such as ‘mid-2013’, ‘late-2014’ and ‘mid-2015’ have been replaced by ‘timeline-light’ references such as ‘considerable time’, ‘patience’, and ‘some time’.  Because of the strong possibility for additional disruptive market volatility on the approach of policy normalization as an outgrowth of reduced visibility, the Fed should be expected to continue to use ‘timeline-light’ references until its first policy rate hike.  

Though the continuation of vague calendar or time references about future policy intent will irk some Fed officials, a majority will be expected to carry forward this effort. Therefore, given the reduction in the visibility provided by Fed guidance in the loss of the policy-path tapering and the erosion of time to a mid-2015 policy rate adjustment, we should expect that despite some argument from both doves and hawks, the ‘considerable time’ language is likely to remain until at least December. 

Success of Policy-Path Tapering

There was no schedule, reference to process or time until completion offered in the May/June 2013 outburst(s) where then Fed Chairman Bernanke indicated the Fed would likely begin scaling back the level of securities purchases.  The latest efforts toward providing monetary policy support at the zero bound (QE3) had been categorically different from previous efforts because this latest program had no stated ending date or limit to the amount of securities eventually to be purchased in the program.  As such this program carried a stronger message that the Fed was willing to go to great lengths to insure its success.  Any signal or Fed conveyance of interest to end such a program needed to provide a level of detail commensurate with the importance of that program.  The lack of that detail offered in May/June ‘13 about the scaling back in securities purchases caused great concern and a dramatic jump in yields.

At the December 2013 FOMC meeting, the Fed outlined a program for reducing the monthly level of securities purchased by $10B and laid out a plan for ending the purchase program according to a schedule that would include regular and similar reductions in amounts purchased.  At that meeting the Fed indicated the $10B reduction starting in January would ‘modestly reduce the pace of its asset purchases’.  They also noted that if continued progress toward policy goals was achieved they would ‘likely reduce the pace of asset purchases in further measured steps at future meetings.’  By using ‘modest’ to describe the initial purchase reduction and by indicating ‘further measured steps’ for progress, the Fed outlined a detailed ‘policy-path’ for tapering.

Unlike mid-2013, the clear pronouncement of the schedule for eliminating the purchase program gave economic agents an advance preview of forthcoming Fed monetary policy timeline, providing anyone who chose, an opportunity to plot out a path for the winding down of the program, of course conditional on steady expected progress on policy goals.  Although the Fed was reducing the amount of additional monthly stimulus, it provided something in its place; visibility.  As such there was no adverse reaction as was witnessed in the mid-2013 ‘taper-tantrum’.  The Fed had succeeded by using its ability to add visibility to the monetary policy timeline, providing truly usable forward guidance. 

Fed Guidance Now

 The nature of Fed guidance is changing on the approach of normalization in monetary policy.  Timeline references become absent as we near the inevitable policy rate movement above the zero-bound.  Less definitive catchwords are used, such as the current ‘considerable time’ which many believe to include at least several FOMC meetings or nearly half a year.  This phrase, casually suggested to mean roughly 6 months when Fed Chair Yellen spoke at her first post-FOMC press conference, lost some of that clarity when Fed Governor Stanley Fischer more recently suggested it could mean anywhere from 2-12 months.    

The absence of timeline visibility in monetary policy on approach of transitioning from easy to less accommodative policy intent is naturally a period of angst.  By forwarding a schedule of intended steps for the process of normalization (‘Exit Plan’), the Fed adds back some level of certainty reduced by their inability to provide timeline or date dependent guidance on the policy rate. 

Further, the Fed will likely give some additional information about the timing and process for reducing and eliminating the reinvestment of its portfolio interest and principle receipts.  We should expect this guidance to be somewhat similar to the structure of the ‘policy-path’ for tapering.  The announcement of that process will provide some timeline policy visibility, offering support during a period of adjustment toward policy normalization.      

Of course the Fed’s post-FOMC meeting statement will continue to be a strong source of guidance, as will the Minutes and the Beige Book.  All of these regular opportunities for communication can provide a picture of policy stability and foresight, offering both financial and economic support. 

The most recent beige book made great efforts to paint a picture that conditions had not changed much at all since the last Beige Book was presented in front of the September FOMC meeting.  There were no fewer than seven instances, covering overall economic growth, consumer spending, employment and price pressures, where the pace of growth was indicated to have been consistent with the previous reporting period.  The message here is that we should not expect great change in either the statement or the current path for monetary policy despite recent short-lived market turmoil.   

Monday, September 15, 2014

FOMC Report; September 16-17, 2014

The Importance of Communication

The first order of business discussed in the Minutes from the last FOMC meeting in July was the formation of a ‘New Subcommittee on Communications’.  It seems reasonable therefore that we begin this report on that topic.  First, this subcommittee was appointed by Chair Yellen in the interim period between the June and July FOMC meetings.  It is possible therefore this subcommittee offered some input at the July FOMC meeting.  More likely however is that this subcommittee will give its first briefing at the September FOMC meeting or later. 

Secondly, little was noted in the press about the formation of this subcommittee, whose attention was likely diverted by the lengthy discourse on the business of monetary policy normalization also included in the Minutes of the July FOMC meeting.  In circles where monetary policy is discussed, policy normalization is currently a lot more ‘sexy’ then communication.   However, if the process of normalization is to be successful and at all smooth, it will require considerable linguistic agility. 

Finally, we should recognize the importance that Chair Yellen attaches to communication, quite likely furthered when, as then Vice-Chair she led the last subcommittee tasked to review this issue.  Recognizing the importance of this topic, I dedicated much of my last FOMC Report[i] to the analysis of her April 2013 speech ‘Communication in Monetary Policy’ which was instructive in learning her views on the normalization of monetary policy.  Communication in monetary policy, whether appreciated or scorned has become integrated as never before into the fabric of monetary policy implementation.  Chair Yellen, in her April ’13 speech[ii] indicated; ‘The FOMC had journeyed from "never explain" to a point where sometimes the explanation is the policy‘, leaving little doubt the importance she places on communication.  

Today’s most widely talked about Federal Reserve monetary policy issue is whether or not the Fed at this meeting will communicate its intentions for the policy rate using the now familiar term ‘considerable time’.  Intended or otherwise, within the decision process on the timing of policy rate lift-off, the term ‘considerable time’ has become a touchstone for Fed policy intent in general.     

There are good reasons for keeping the ‘considerable time’ language and strong argument for removing.  Because the new subcommittee on communications is likely to have some input on the matter, either individually or collectively at this or subsequent meetings, we might review the members of this panel as relates to their tendencies regarding monetary policy communication and guidance. 

The subcommittee is comprised of two members from the Board of Governors (Stanley Fischer and Jerome Powell) and two District Bank Presidents (Loretta Mester (Cleveland) and John Williams (San Francisco)).  Among the four, only Williams does not currently vote on policy matters.  Having succeeded Yellen at the Federal Reserve Bank of San Francisco, Williams is seen as supportive of her views on the importance of communication as a policy tool. 

In February at the Money Marketeers of NY University[iii] Williams spoke favorably of a return to qualitative guidance, offering; “…our forward guidance should be aimed at providing the public with a good understanding of the key drivers of our policy decisions.”  At the March FOMC Meeting shortly after that speech, the Fed dropped the quantitative ‘threshold guidance’ for date-referenced ‘considerable time’.   

The most senior member of this subcommittee, Vice-Chair Fischer, has indicated a dislike for forward guidance[iv].  Having had experience using forward guidance as Governor of the Bank of Israel he found it ‘restricted the bank’s future actions when circumstances changed.’  He has offered further; “You can’t expect the Fed to spell out what it’s going to do,” “Why? Because it doesn’t know.”  and “We don’t know what we’ll be doing a year from now. It’s a mistake to try and get too precise.”

Fischer is in a very good position to retard or help to reverse the trend toward ever-increasing levels of guidance.  Fischer’s arrival as Vice-Chair of the Board of Governors, in advance of a shift toward lesser amounts of accommodation may be quite timely.  He can present from a position of experience a convincing view of the dangers of excessive guidance.  As needed levels of monetary policy support diminish on the achievement of stated policy goals, the Fed may have by then learned to communicate without outlining too concisely the outlook for longer-timeframe policy intent. 

 The Federal Reserve Bank of Cleveland’s new President, Loretta Mester recently called for forward guidance change[v]; "I believe it is again time for the Committee to reformulate its forward guidance," adding "…striving for clearer communication will yield benefits, especially as we undertake normalization", a process she feels is complicated by the size and duration of SOMA holdings.  Considered to have hawkish tendencies, Mester will likely side with Fischer in the interest of using less forward guidance overall in policy communication. 

Finally, Fed Governor Jerome Powell rounds out the new subcommittee on communications.  Powell, days before taking oath of office in June to begin a fresh 14-year term on the Fed Board, spoke out in favor of forward guidance[vi]; ‘In my view, forward rate guidance has helped reduce medium and longer-term interest rates, and by doing so has provided meaningful support for the economy. First, by increasing public understanding and market confidence in the path of rates, guidance has helped reduce term premiums. Second, by communicating that rates would remain lower for longer than market participants might otherwise have expected, guidance has lowered medium- and longer-term rates through the expectations channel. Finally, even when guidance has initially been well aligned with market expectations, it has reduced the likelihood that rate expectations will subsequently shift upward in ways that the Committee does not intend. Event studies as well as market-implied quotes and surveys corroborate the view that guidance has reduced medium- and longer-term interest rates and has held down volatility as well. To be sure, there have also been times when forward guidance and market expectations have diverged, with resulting spikes in volatility. Such situations may be difficult to avoid, given the use of new, unconventional policy tools, although we always try to communicate policy as clearly as possible. ‘  

A very crude interpretation of the above would place Messrs Powell and Williams together leaning toward continued use of forward guidance and for Mr. Fischer and Ms. Mester calling for less.  Although the time is not now upon us, Vice-Chair Fischer is expected eventually to win out, prompting the Fed to scale back on its forward guidance as it moves more deeply into the process of accommodation removal.  Should he fail however in that effort, the repercussions may be quite similar to the last time (mid-’04 to mid-’06) the Fed used too much forward guidance (‘measured pace’) while ‘intending’ to be less accommodating (see ‘The Dark Side of Fed Transparency’[vii]).

Process of Normalization Doesn’t Now Include Dropping ‘Considerable Time’

The best argument for dropping the use of date-referenced ‘considerable time’ language in the September FOMC meeting Statement is that ; There appears to be less need ‘to support continued progress toward maximum employment and price stability, as the Committee today need not reaffirm its view that a highly accommodative stance of monetary policy remains appropriate.’  Further, ‘The Committee having assessed the progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation has determined that continued support, need not include the maintenance of the current 0 to 1/4 percent target range for the federal funds rate for a considerable time.’ 

To be frank, the market is just not ready for a message that is ‘interpreted’ as indicating a relatively soon lift-off date.  Instead, the Fed will continue to use the term ‘considerable time’ until a very strong majority has denounced its value in describing appropriate monetary policy guidance - most likely at December’s FOMC meeting.  Adherence to this December meeting schedule will allow the Fed to remove the ‘considerable time’ language with the result being a collective, thankful sigh by economic agents instead of a strong and unwanted upward adjustment in interest rates and a reduction in levels of supportive risk assumption if the Fed were to spook market participants by dropping the language too early.

It is not necessarily appropriate that economic agents place such importance to the term ‘considerable time’.  Clearly the Fed has outlined extensively the conditions that shall be expected to prevail when it believes excess accommodation will be less needed.  While progress toward those goals has been keen, repeated overestimation of forward economic prospects has persuaded many Fed officials to allow slightly overstimulative policies to remain in place beyond their time rather than dismissed prematurely. 

Recognizing that benefits in keeping current Statement language outweigh its removal, the Committee will, with some grumbling on both sides of the aisle, elect to maintain the date-reference ‘considerable time’ reference. 

Policy Prescription Further Afield

As earlier indicated, the Minutes of the July FOMC Meeting gave considerable attention to the process of ‘Monetary Policy Normalization’ prompting me to offer an analysis of the Minutes[viii].  Below are some points that deserve additional attention (italics, bold and underline are my additions):
  • ‘Meeting participants continued their discussion of issues associated with the eventual normalization of the stance and conduct of monetary policy, consistent with the Committee's intention to provide additional information to the public later this year, well before most participants anticipate the first steps in reducing policy accommodation to become appropriate.’  The Fed will bring forth additional information on how they intend to normalize the stance and conduct of monetary policy.  They will not provide that information in the September FOMC meeting Statement nor will they give a specific outline of the process in the Minutes for the September meeting.  Instead, they will provide that guidance ‘later this year’, probably in October, but possibly not until the December Meeting.  Otherwise they would have said ‘soon’ to indicate September.
  • ‘The staff detailed a possible approach for implementing and communicating monetary policy once the Committee begins to tighten the stance of policy.’   The Fed has ‘the’ exit strategy fairly well hammered out as indicated by the staff providing only ‘a’ single possible approach.  There were two meeting participants seemingly not fully onboard, but they will be swept along with a consensus vote.  The Fed is capable of presenting this exit strategy today, but will wait for a time when they can provide that information together with some additional guidance which is intended to be supportive, such as an intention to refrain from outright portfolio sales until at least 2018. 
  • ‘In general, they agreed that the size of the balance sheet should be reduced gradually and predictably.’  The Fed will at some point make available a ‘policy path’ description of the reduction in the reinvestment of principal and interest, thus providing some level of communication support despite the action of discontinued reinvestment as otherwise being less accommodative.  This approach is consistent with that used for the ‘policy path’ reduction in securities purchases; otherwise know as ‘tapering’.     

Connecting the Dots

The Fed has consistently scaled back its estimate for ‘longer run’ GDP growth and recently scaled back its estimate for the appropriate longer run or equilibrium target policy rate.  It is difficult to call the timing to the end of this trend.  Many feel there is room for further reduction to both in the updated release of the Summary of Economic Projections (SEP) provided at this meeting.  Currently the longer run real GDP forecast is 2.1-2.3% as a central tendency.  This central tendency forecast was as high as 2.3-2.5% as recently as June of last year.  Similarly, the longer run SEP forecast for targeted fed funds rate was 4% since 2012 and reduced to 3.75% at the June, 2014 meeting. 
References for longer run real GDP and targeted fed funds rates are not expected to come lower at this meeting.  Additionally, there is room for the SEP expectation for year-end policy rates for 2015 and 2016 to move slightly higher from 1.13% and 2.5% respectively in June.    The initial SEP forecast for year-end 2017 target fed funds rate may be very near or even at the longer run 3.75% latest posting.     

[i] Martin McGuire; The Fed and Interest Rates; FOMC Report July 29-30, 2014; http://www.thefedandinterestrates.blogspot.com/2014_07_01_archive.html
[ii] Vice Chair Janet L. Yellen; At the Society of American Business Editors and Writers 50th Anniversary Conference, Washington, D.C. - April 4, 2013; ‘Communication in Monetary Policy’ http://www.federalreserve.gov/newsevents/speech/yellen20130404a.htm

[iii] Federal Reserve Bank of San Francisco; February 19, 2014; ‘Fed’s Williams Talks Qualitative Guidance’ http://www.frbsf.org/our-district/press/news-releases/2014/economic-conditions-monetary-policy-transition-speech/

[iv] The Wall Street Journal; September 23, 2013; ‘The Key to Forward Guidance? Don’t Give It, Fischer Says’; http://blogs.wsj.com/economics/2013/09/23/the-key-to-forward-guidance-dont-give-it-fischer-says/

[v] Reuters; September 4, 2014; ‘Cleveland Fed’s new chief calls for forward guidance change’; http://www.reuters.com/article/2014/09/04/us-usa-fed-mester-idUSKBN0GZ25F20140904

[vi] Governor Jerome H. Powell; At the 2014 Spring Membership Meeting, Institute for International Finance, London, United Kingdom - June 6, 2014; ‘A Conversation on Central Banking Issues’; http://www.federalreserve.gov/newsevents/speech/powell20140606a.htm

[vii] Martin McGuire; The Fed and Interest Rates; ‘The Dark Side of Fed Transparency’ – FOMC Report October 25, 2006; http://www.thefedandinterestrates.blogspot.com/2006/10/dark-side-of-fed-transparency.html
[viii] Martin McGuire; The Fed and Interest Rates; ‘Analysis of Minutes of the Federal Open Market Committee;  July 29-30, 2014; http://www.thefedandinterestrates.blogspot.com/2014/08/analysis-of-minutes-of-federal-open.html

Thursday, August 21, 2014

Analysis of Minutes of the Federal Open Market Committee; July 2014

Minutes of the Federal Open Market Committee;  July 29-30, 2014

Untitled Beginning of Minutes
1.     New Subcommittee on Communications: Chaired Governor Fischer, Pres Mester, Gov Powell and Pres Williams.
a.      This was the first notice in the Minutes.  Communication is a very important aspect of the role of Chair for Yellen.  She appears determined to maximize the role of communication in bringing about efficiencies in the use of new and legacy monetary policy tools.
b.     Gov Fischer is not known to be a big fan of forward guidance.
Monetary Policy Normalization
2.     ‘Meeting participants continued their discussion of issues associated with the eventual normalization of the stance and conduct of monetary policy, consistent with the Committee's intention to provide additional information to the public later this year, well before most participants anticipate the first steps in reducing policy accommodation to become appropriate.’
a.      Importantly, the interest is to normalize both the ‘stance’ and ‘conduct’, bringing as soon as possible a return to pre-crisis operating standards.  This outline is intended to be provided before year end. 
3.     ‘The staff detailed a possible approach for implementing and communicating monetary policy once the Committee begins to tighten the stance of policy.’
a.      The choices for implementation and communication appear to have been reduced to ‘a’ approach worthy of staff detail.  All else equal, this points toward an earlier advance of formal exit strategy procedures.  
b.     This is not a new approach, but rather evolved from ‘discussion of normalization strategies and policy tools during the previous two meetings.’
4.     ‘Almost all participants agreed that it would be appropriate to retain the federal funds rate as the key policy rate, and they supported continuing to target a range of 25 basis points for this rate at the time of liftoff and for some time thereafter.’  
a.      Widely supported use of Fed Funds as ‘communication tool’ using a 25 basis point range for a not-indefinite period, but rather reverting eventually to normalization of conduct.
5.     ‘However, one participant preferred to use the range for the federal funds rate as a communication tool rather than as a hard target, and another preferred that policy communications during the normalization period focus on the rate of interest on excess reserves (IOER) and the ON RRP rate in addition to the federal funds rate.’
a.      ‘one’ participant seems not to understand that the use of fed funds at lift-off ‘is’ a communication tool and not a hard target.  The ‘another’ points this out by preferring use of IOER and ON RRP not only as ‘mode of conduct’, but also highlighted as communication tool. 
b.     Only two were not completely yet on board for ‘staff’ proposal of process and communication.  Again, this implies a sooner announcement of exit strategy procedures.
6.     ‘In addition, most thought that temporary use of a limited-scale ON RRP facility would help set a firmer floor under money market interest rates during normalization.’
a.      The Fed appears to want to initiate lift-off with strong use of ON RRP, but when sufficient traction is achieved and Fed communication is capable of ‘directing’ market rates they will reduce the role of ON RRP.
7.     ‘Alternatively, some participants suggested the ON RRP rate could be set below the bottom of the federal funds target range, judging that it might be possible to begin the normalization process with minimal or no reliance on an ON RRP facility and increase its role only if necessary. However, many other participants thought that such a strategy might result in insufficient control of money market rates at liftoff, which could cause confusion about the likely path of monetary policy or raise questions about the Committee's ability to implement policy effectively.
a.      There are ‘some’ participants that want very limited role for ON RRP and would prefer to place under ff target range.  ‘Many’ point to a desire to secure market confidence ‘about a likely path of monetary policy’.  ‘Policy-path’ has become a strong FOMC draw.
8.     ‘Participants expressed their desire to include features in the facility's design that would limit the Federal Reserve's role in financial intermediation and mitigate the risk that the facility might magnify strains in short-term funding markets during periods of financial stress.’
a.      The only noted method for ‘limiting’ and ‘mitigating’ was ‘limiting the program's size’.
9.     ‘In general, they agreed that the size of the balance sheet should be reduced gradually and predictably.’
a.      Gradual and predictable reduction in the size of the balance sheet is ‘a policy-path’. 
10.  ‘A few participants noted that the appropriate size of the balance sheet would depend on the Committee's future decisions regarding its framework for monetary policy.’
a.      There are some who would want a larger balance sheet for a longer time-frame or possibly even as a permanent condition.
11.  ‘Most participants continued to anticipate that the Committee would not sell MBS, except perhaps to eliminate residual holdings.’
a.        This is not a large step away from conferring similarly on Treasury holdings.    
12.  ‘Some others noted that, given the uncertainties attending the normalization process and the outlook for the economy and financial markets, it could be helpful to retain the option to sell some assets.’
a.      The willingness to consider the use of the balance sheet as a ‘tactical’ tool to combat financial excesses.  Awesome, I have been waiting since ’09 for this recognition. 
13.  ‘They stressed the importance of communicating a clear plan while at the same time noting the importance of maintaining flexibility so that adjustments to the normalization approach could be made as the situation changed and in light of experience.’
a.      Of course the Fed wants to play from both sides of the street.  They want the benefit in support for economic growth that comes from ‘communicating a clear plan’.  They also want to retain enough options to adjust the timing, pace and avenue for ‘normalization of policy’ in both ‘stance’ and ‘conduct’.  This is one of the biggest challenges the Fed has and they have created a new subcommittee to help in communicating these variables. 
14.  ‘A few participants also suggested that the Committee should solicit additional information from the public regarding the possible effects of an ON RRP facility, but some others pointed out that the Committee would continue to receive such feedback informally in response to its ongoing communications regarding normalization.’ 
a.      Not everyone is completely comfortable that they have enough information to move forward.  However, a majority understands that novel approaches to monetary policy come with uncertainties and inaction can be as or more dangerous than making informed decisions without complete assurance.  
Staff Review of the Economic Situation  
15.  Growth: ‘…(GDP) rebounded in the second quarter following its first-quarter decline, but it expanded at only a modest pace, on balance, over the first half of the year.’
a.      Moderate is ok, but we learn later in minutes (# 33 below) that somewhat elevated concerns still attend weak Q1 performance.
16.  Inflation:  ‘Consumer price inflation rose somewhat in the second quarter, but futures prices for energy and agricultural commodities generally were trending down over the next couple of years and longer-run measures of inflation expectations remained stable.’
a.      Higher inflation today, but suggesting energy and agriculture to help keep lid on next two years and standard message of longer-run expectations.
17.  Labor: ‘Measures of labor market conditions generally continued to improve…’
a.      ‘…nonfarm payroll employment increased strongly in June…’- ‘…largest since the first quarter of 2012’
b.     ‘…unemployment rate declined to 6.1 percent in June…’
c.      ‘...labor force participation rate was unchanged…’
d.     ‘…employment-to-population ratio edged up…’
e.      …rate of long-duration unemployment moved down…’
f.      ‘…share of workers employed part time for economic reasons edged up…’
g.     ‘…Initial claims for unemployment insurance declined further…’
h.     ‘…rate of job openings rose further in May,…’
i.       ‘…rate of hiring was unchanged and remained at a modest level.’
                                                    i.     Of the 9 labor variables mentioned, ‘a’, ‘b’, ‘d’, ‘e’, ‘g’,  and ‘h’ were constructive (67%), ‘c’ and ‘i’ were neutral (22%), and  ‘f’ was weak (11%).
18.  ‘Near-term inflation expectations from the Michigan survey were little changed, on net, in June and early July, while longer-term expectations declined.’
a.      The is one of the few notices in the Minutes that suggest continued excess accommodation may be appropriate for longer than currently communicated.
Staff Review of the Financial Situation
19.  ‘Financial conditions eased somewhat, on balance…’
20.  ‘Market participants characterized the Federal Reserve's monetary policy communications over the intermeeting period as suggesting a slightly more accommodative policy stance than had been expected.
a.      The committee is now willing to make reference to the general stance of communication over the intermeeting period, giving value judgment to that communication with respect to the difference from perceived market consensus views.  In other words, here is where market consensus is and this was our message relative to that consensus view which may have influenced in ‘this direction’. 
b.     A new step in analysis of communication which may serve to create a more unified intermeeting message.
21.  ‘The median dealer continued to see the third quarter of 2015 as the most likely time for the liftoff of the federal funds rate from the effective lower bound, although, relative to the June survey, the distribution of the modal expected time of liftoff became more concentrated around the third quarter of 2015.’
a.      That a survey of expectations would center more closely around a date as that date approached is not surprising or interesting unless there was a ‘collapse’ of expectation toward Q3 lift-off.  In any event, the Fed can work well with a tight distribution of expectations, pushing those in or out along the timeline as needed. 
22.  ‘The decline in yields at the long end of the curve likely also reflected a continuation of a pattern that began last year, which some market participants attributed to a reduction in investors' expectations for longer-run economic growth and declines in term premiums.’
a.      Bingo. Doubtless this is a strong and lasting influence on long rates.  At what point this influence is ‘overpriced’ is not currently clear, but will at some point be a source of untold rewards.
23.  ‘The staff's periodic report on potential risks to financial stability concluded that relatively strong capital positions of U.S. banks, subdued use of maturity transformation and leverage within the broader financial sector, and relatively low levels of leverage for the aggregate nonfinancial sector were important factors supporting overall financial stability. However, the staff report also highlighted that low and declining risk premiums, low levels of market volatility, and a loosening of underwriting standards in a number of markets raised somewhat the risk of an eventual correction in asset valuations. ‘ 
a.      Wonderfully concise synopsis.
Staff Economic Outlook
24.  ‘To reconcile the downward revision to real GDP growth for the first half of year with an unemployment rate that was now closer to the staff's estimate of its longer-run natural rate, the staff lowered its assumed pace of potential output growth this year by more than it marked down GDP growth. As a result, resource slack in this projection was anticipated to be somewhat narrower this year than in the previous forecast and to be taken up slowly over the projection period.’
a.      This is a big statement that provides a message that the staff believes the output gap is smaller than they earlier believed.  As such, the basis for excessive accommodation is to this extent reduced.
25.  ‘The staff's near-term forecast for inflation was revised up a little, as recent data showed somewhat faster-than-anticipated increases that were judged to be only partly transitory. With a little less resource slack in this projection, the medium-term forecast for inflation was also revised up slightly.’ 
a.      Not entirely transitory up-tic in near-term inflation forecast and the output gap reduction brings higher medium-term forecast.
26.  ‘The staff continued to view uncertainty around its projections for real GDP growth, inflation, and the unemployment rate as roughly in line with the average of the past 20 years.’
a.      The 20 year average is likely longer than most staff remain at the Fed and appears a reference that gives only limited information.  Instead, they might regard uncertainty around projections as trending higher or lower over the last 3-6 months. 
Participants’ View on Current Conditions and the Economic Outlook
27.  ‘Although most participants continued to view the risks to the outlook for economic activity and the labor market as nearly balanced, some pointed to possible sources of downside risk, including persistent weakness in the housing sector, a continued slow rise in household income, or spillovers from developments in the Middle East and Ukraine.’   
a.      A majority note nearly balanced while some rightly point to slow income gains.  ‘Headlines’ of the day have also attracted their attention.
28.  ‘Participants noted that inflation had moved somewhat closer to the Committee's 2 percent longer-run objective and generally saw the risks of inflation running persistently below their objective as having diminished somewhat.’
a.      This is the strongest reference to inflation seen in a long time. 
29.  ‘Participants generally agreed that both the recent improvement in labor market conditions and the cumulative progress over the past year had been greater than anticipated and that labor market conditions had moved noticeably closer to those viewed as normal in the longer run.’
a.      Consistent and unexpected improvement in labor market conditions would suggest, all else equal, a sooner ‘lift-off’. 
b.     Participants offered the following assessments of labor market variables:
                                                    i.     ‘pickup in payroll employment gains’
                                                  ii.     ‘noticeable decline in the overall unemployment rate’
                                                iii.     ‘reductions in… long- duration joblessness’
                                                iv.     ‘reductions in… the number of workers with part-time jobs who would prefer full-time employment’
                                                  v.     ‘labor force participation rate was stable’
                                                vi.     ‘transition rate from long-duration unemployment to employment had moved up’
                                              vii.     ‘increased hiring and turnover in the labor market’
                                            viii.     ‘increases in job openings and hiring plans’
                                                ix.     ‘higher quit rates’
                                                  x.     ‘apparent improvements in matching workers and jobs’
1.     There are 9 of 10 positives and 1 neutral above.
30.  ‘Most now judged that the downside risks to inflation had diminished, but a few participants continued to see inflation as likely to persist below the Committee's objective over the medium term.’
a.      A stronger willingness to move forward with removal of excess accommodation is advance by a belief of reduced risk for deflation.
31.  ‘In their discussion of financial stability issues, participants noted evidence of valuation pressures in some particular asset markets, but those pressures did not appear to be widespread and other measures of vulnerability in the financial system were at low to moderate levels.’
a.      Financial stability does not seem to be a strong source of concern at this point.  Participants appeared unwilling to name, as Chair Yellen had done with ‘media’ and ‘biotech’, any ‘particular asset markets’. 
32.  ‘Indeed, some participants viewed the actual and expected progress toward the Committee's goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting the Committee's unemployment and inflation objectives over the medium term. These participants were increasingly uncomfortable with the Committee's forward guidance. In their view, the guidance suggested a later initial increase in the target federal funds rate as well as lower future levels of the funds rate than they judged likely to be appropriate.’
a.      We shall look very closely for any changes in the language concerning forward guidance for the policy rate in the Statement at upcoming FOMC meetings.  This is not a single participant concern (‘some’).  Hawks want a forward guidance change.
33.  ‘However, most participants indicated that any change in their expectations for the appropriate timing of the first increase in the federal funds rate would depend on further information on the trajectories of economic activity, the labor market, and inflation. In particular, although participants generally saw the drop in real GDP in the first quarter as transitory, some noted that it increased uncertainty about the outlook, and they were looking to additional data on production, spending, and labor market developments to shed light on the underlying pace of economic growth.’
a.      This is a valid argument for postponing an immediate mover toward lesser accommodation.  The nature of the weakness in the first quarter is not yet fully understood.  Continued observation of forthcoming economic data is needed to provide greater assurances of the transitory nature of first quarter weakness. 
Committee Policy Action
34.   ‘In particular, they worried that the degree of labor market slack was difficult to characterize succinctly and that the statement language might prove difficult to adjust as labor market conditions continued to improve.’
a.      These minutes were approved by all participants and they all agreed to leave the statement ‘as labor market conditions continued to improve’ unencumbered by any conditional reference.  This implies they all expect better labor market conditions ahead.
b.     Additionally, participants are concerned with the aspect of communication for changing value parameters of a collection of labor market condition variables.

The balance of the ‘Committee Policy Action’ section and remainder of the Minutes offers little additional interpretative value.