MINUTES OF THE JUNE 17-18 FOMC MEETING: IOER AND REVERSE REPOS COULD BE USEFUL IN NORMALIZING POLICY; TAPER LIKELY TO CONCLUDE IN OCTOBER
- Officials felt that using both the interest on excess reserves (IOER) and reverse repo facility could be used in policy normalization
- Could end bond purchasing program following the October meeting if economic conditions are still positive; Committee agrees that final $15B taper likely in Oct
- Many agree should end reinvestments of securities either at the time of or after Fed funds rate is increased, want to wind down reinvestments gradually
- Some officials concerned about persistent low inflation, some officials expect faster inflation pickup or upside risk to inflation
- labor conditions continued to improve. average wages have continued to rise but only at a modest rate
- some concern about the softness in residential construction
- notes that supervisory measures could be implemented if necessary to curb excessive risk taking
- Most participants agreed that adjustments in the rate of interest on excess reserves (IOER) should play a central role during the normalization process. It was generally agreed that an ON RRP facility with an interest rate set below the IOER rate could play a useful supporting role by helping to firm the floor under money market interest rates. One participant thought that the ON RRP rate would be the more effective policy tool during normalization in light of the wider variety of counterparties eligible to participate in ON RRP operations. The appropriate size of the spread between the IOER and ON RRP rates was discussed, with many participants judging that a relatively wide spread--perhaps near or above the current level of 20 basis points--would support trading in the federal funds market and provide adequate control over market interest rates. Several participants noted that the spread might be adjusted during the normalization process.
- Also discussed the appropriate time for making a change to the Committee's policy of rolling over maturing Treasury securities at auction and reinvesting principal payments on all agency debt and agency MBS in agency MBS. It was noted that, in the staff's models, making a change to the Committee's reinvestment policy prior to the liftoff of the federal funds rate, at the time of liftoff, or sometime thereafter would be expected to have only limited implications for macroeconomic outcomes, the Committee's statutory objectives, or remittances to the Treasury. Many participants agreed that ending reinvestments at or after the time of liftoff would be best, with most of these participants preferring to end them after liftoff
- Labor market indicators generally showed further improvement. The unemployment rate, though lower, remained elevated. Household spending appeared to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow