FOMC Minutes Revealed Rationale for Emergency Cuts and QE Inifinity

As noted in the FOMC minutes for the March emergency meeting, the members agreed that economic situation has “deteriorated sharply” in light of the coronavirus pandemic. They were also in “strong support” of the measures to facilitate the flow of credit to households and businesses. Despite the consensus that “a forceful monetary policy” is needed, the size of rate cut and the rationale of QE infinity were rigorous debated.

There was a consensus that rate cuts and QE resumption announced in March were to contain the severe impacts of the coronavirus pandemic on the country’s economy. All members agreed that the “near-term” economic outlook had “deteriorated sharply”. They were also of the view that the outlook was “profoundly uncertain”, noting that “the timing of the resumption of growth in the US economy depended on the containment measures put in place, as well as the success of those measures, and on the responses of other policies, including fiscal policy”. The members also indicated that “a stronger dollar, weaker demand, and lower oil prices” would pose “downward pressure on inflation in the period ahead”. As such further accommodative measures were needed for the achievement of the 2% inflation target.

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After the emergency rate cut, of -50 bps, on March 3, the Fed surprised the market with a -100 bps reduction on March 18. While a rate cut was unanimous, the size was debatable. Loretta Mester dissented at the March 18 as she was in favor of a -50 bps cut. The minutes revealed that, besides her,  “a few participants” initially preferred to cut by -50 bps and “wait until there was greater assurance that the transmission mechanism of monetary policy via financial markets and the supply of credit to households and business was working effectively”.

Following the emergency cuts in March, the Fed funds rate has fallen to the record low range of 0-0.25%. The limited room for further reduction has raised concerns about the central bank’s capability to provide further stimulus to the market. Regarding this, some participants suggested that “new forward guidance or balance sheet measures could be introduced”. With the policy rate now at the effective lower bound, some members suggested that the current level should be “maintained at this level until they were confident that the economy had weathered recent events and was on track to achieve the Committee’s maximum employment and price stability goals”.

Concerning QE infinity, the members emphasized that the purpose was to “support the smooth functioning of Treasury and agency MBS markets rather than to provide further monetary policy accommodation by pushing down longer-term yields”. Meanwhile, a
“couple of participants noted that because some of the purchases would be at longer maturities, the purchases could provide some accommodation by lowering longer-term yields”.

Given the great uncertainty in the economic developments both in the US and globally, it is inevitable for the Fed to act more in the near future. Yet, the lack of ammunition in the monetary policy front suggests that the focus would have to be on the fiscal side.