US central bankers expected at their October meeting that they would begin cutting the stimulus program “in coming months”, the minutes of that meeting show.
The Federal Open Market Committee left the $US85 billion ($A90.3 billion) a month asset-purchase program unchanged at the October 29-30 meeting.
But policymakers felt at the time that the labour market would continue to improve enough to soon begin the long-awaited taper of the program.
“They generally expected that the data would prove consistent with the committee’s outlook for ongoing improvement in labour market conditions and would thus warrant trimming the pace of purchases in coming months,” the minutes said on Wednesday.
At the same time, the group reiterated that any such move was contingent on data continuing to show a strengthening economy, and they discussed the need to better communicate their expectations for interest rate changes.
They noted that markets had overly linked together two separate policy decisions – when the asset purchases would be cut, and when the Fed would begin raising its base interest rate.
US bond yields and market interest rates surged beginning in May after Fed Chairman Ben Bernanke signalled that they could begin cutting the asset purchase program by late this year if the economy continued to improve.
Yet at the time, and still now, the FOMC has stressed that it has no plans to raise its benchmark rate from 0-0.25 per cent level, where it has stood for nearly five years, before 2015.
The FOMC discussed ways it could shape its communication to “help the public separate the committee’s purchase program from its policy for the federal funds rate and the overall stance of policy.”
On action that most of the meeting participants thought could be weighed to reinforce its message that the base interest rate would be kept low was to reduce the rate the Fed pays on commercial banks’ excess reserves.
“The benefits of such a step were generally seen as likely to be small except possibly as a signal of policy intentions,” the minutes said.
Good news for the Aussie dollar
The sooner the US begins tapering its economic stimulus program the better, particularly for the high Australian dollar, a Reserve Bank of Australia assistant governor says.
The US Federal Reserve has said it will begin to taper its $85 billion-a-month bond buying program when unemployment falls significantly.
It will be good news for the global economy when that does happen, even if it causes disruption along the way, RBA assistant governor (financial markets) Guy Debelle told a financial markets forum in Sydney on Wednesday.
“The day when this actually comes is a desirable thing because it means that their assessment is that the US outlook is stronger,” Dr Debelle said.
“When people are exiting from unconventional monetary policy because their economies are stronger and their economic outlooks are brighter, that, I think, is unambiguously a good thing and a hell of a lot better than the alternative.
“Is it disruptive along the way? Yes, it undoubtedly is going to be so, but the alternative is worse, which is that the major economies of the world have stagnation indefinitely and these sorts of unconventional monetary policies continue indefinitely – that’s a hell of a lot worse than the prospects associated with exit.”
Tapering would also help lower the Australian dollar, Dr Debelle said, which the RBA has previously described as being “uncomfortably high”.
In the minutes of its November board meeting, released on Tuesday, the RBA said a lower Australian dollar was needed to rebalance growth in the Australian economy.
“As we’ve said on a number of occasions, we would prefer (the Australian dollar) be lower,” Dr Debelle said.
“One major thing which will do that will be the day when the US changes its monetary policy direction.
“The sooner that day comes, the better, but that’s not in our hands, that’s in their hands.”