Fed begins policy exit talks, split on view of U.S. job market

WASHINGTON Thu May 22, 2014 2:50am IST

The sun rises to the east of the U.S. Federal Reserve building in Washington, July 31, 2013. REUTERS/Jonathan Ernst/Files

The sun rises to the east of the U.S. Federal Reserve building in Washington, July 31, 2013.

Credit: Reuters/Jonathan Ernst/Files

Related Topics

WASHINGTON (Reuters) - Federal Reserve policymakers last month began laying groundwork for an eventual retreat from easy monetary policy with a discussion of how to best control interest rates as they remove trillions of dollars from the financial system.

No final decisions were taken, and minutes of the session, released on Wednesday, said the Fed was merely engaged in "prudent planning" and not signaling it was ready to "normalize" monetary policy or raise interest rates any time soon.

Still, the discussion at the central bank's April 29-30 policy-setting session, coupled with fresh comments by top officials, show an intensifying discussion over both exit-strategy details and a developing split over basic analysis of the U.S. economy.

The next policy meeting will be in mid-June, when the panel will be joined by Stanley Fischer, the former Bank of Israel governor whose nomination to the Fed's board was confirmed on Wednesday by the U.S. Senate. The Senate has yet to act on his separate nomination to be Fed vice chairman.

Though the economic forecasts reviewed at the April meeting remained upbeat, the minutes indicated general agreement that any sustained uptick in inflation was still perhaps years off.

Minneapolis Fed President Narayana Kocherlakota said on Wednesday he did not think the Fed's preferred measure of inflation would reach 2 percent until 2018, an argument for leaving loose monetary policy in place. He said the economy's struggle to regain steam might even argue for easing policy further by committing to drive inflation above the Fed's 2 percent target to make up for lost ground.

Participants in the meeting undertook an apparently wide-ranging discussion about U.S. labor markets, dissecting research that suggests a falling share of short-term unemployed could prove an inflationary spark even with long-term joblessness running unusually high - a finding a number of officials said they considered suspect.

Indeed, sluggish wage gains were cited as one indication that the labor market could have more slack than the nation's 6.3 percent jobless rate suggests.

Other officials, however, offered warnings. "Some participants reported that labor markets were tight in their districts or that contacts indicated some sectors or occupations were experiencing shortages of workers," the minutes reported.

CRISIS ERA DRAWING TO A CLOSE

The discussion over how to exit the Fed's highly accommodative policy, once the time comes, is the latest sign that the era of near-zero rates and heavy bond buying is drawing to a close. Having pumped trillions of dollars into the financial system, the Fed must now develop tools to siphon them out as part of the eventual decision to raise target rates.

"Participants generally agreed that starting to consider the options for normalization at this meeting was prudent," the Fed said. It added that the discussion "did not imply that normalization would necessarily begin sometime soon."

Investors expect the Fed to raise rates in the middle of next year at the earliest, and expectation that was little changed by the central bank's latest minutes.

(Reporting by Michael Flaherty and Howard Schneider; Additional reporting by Ann Saphir in San Francisco and David Gaffen and Richard Leong in New York; Editing by Tim Ahmann, Paul Simao and Chizu Nomiyama)

FILED UNDER:
Photo

After wave of QE, onus shifts to leaders to boost economy

DAVOS, Switzerland - Central banks have done their best to rescue the world economy by printing money and politicians must now act fast to enact structural reforms and pro-investment policies to boost growth, central bankers said on Saturday.

Republic Day

Reuters Showcase

Coal Mining

Coal Mining

India to open coal to commercial mining firms soon, minister says  Full Article 

RBI Loan Rules

RBI Loan Rules

RBI relaxes overseas loan recast rules   Full Article 

E-commerce Firms

E-commerce Firms

Amazon, e-commerce rivals fuel commercial property boom in India  Full Article 

Growth Forecasts

Growth Forecasts

Indian economic growth forecasts pegged back, despite rate cuts: Reuters Poll.  Full Article 

Uber is Back

Uber is Back

Uber back in Delhi; govt says must await approval.  Full Article 

Markets at Record

Markets at Record

Sensex rises to record after ECB stimulus programme.  Full Article 

Pharma Sector

Pharma Sector

Ipca Labs hit by FDA ban on plant for standard violations.  Full Article | Related Story 

Forex Reserves

Forex Reserves

India FX reserves at record high as RBI fortifies defences  Full Article 

QE for Euro Zone

QE for Euro Zone

ECB launches 1 trillion euro rescue plan to revive euro economy.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage