Highlights follow, beginning with inflation:
Both headline and core PCE inflation in the first quarter came in below the Committee’s longer-run goal of 2 percent, but these recent lower readings appeared to be due, in part, to temporary factors; other measures of inflation as well as inflation expectations had remained more stable. Accordingly, participants generally continued to expect that inflation would move closer to the 2 percent objective over the medium run. Nonetheless, a number of participants expressed concern that inflation was below the Committee’s target and stressed that future price developments bore careful watching.
Most of the recent reports from business contacts revealed little upward pressure on prices or wages. A couple of participants expressed the view that an additional monetary policy response might be warranted should inflation fall further. It was also pointed out that, even absent further disinflation, continued low inflation might pose a threat to the economic recovery by, for example, raising debt burdens. One participant focused instead on the upside risks to inflation over the longer term resulting from highly accommodative monetary policy.
Two shout-outs to Abenomics:
While the Committee’s accommodative policy continued to provide support to financial conditions, events abroad also influenced U.S. markets over the intermeeting period. In particular, the Bank of Japan announced a new monetary policy program that was considerably more expansionary than markets had expected. …
The effects on a range of asset prices of the Bank of Japan’s recent announcement were cited as added evidence that large-scale asset purchases were effective in easing financial conditions and thereby helping stimulate economic activity.
On the possibility of adjusting the pace of asset purchases:
Participants also touched on the conditions under which it might be appropriate to change the pace of asset purchases. Most observed that the outlook for the labor market had shown progress since the program was started in September, but many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate.
A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome. One participant preferred to begin decreasing the rate of purchases immediately, while another participant preferred to add more monetary accommodation at the current meeting and mentioned that the Committee had several other tools it could potentially use to do so.
Most participants emphasized that it was important for the Committee to be prepared to adjust the pace of its purchases up or down as needed to align the degree of policy accommodation with changes in the outlook for the labor market and inflation as well as the extent of progress toward the Committee’s economic objectives.
Regarding the composition of purchases, one participant expressed the view that, in light of the substantial improvement in the housing market and to avoid further credit allocation across sectors of the economy, the Committee should start to shift any asset purchases away from MBS and toward Treasury securities.
On the review of the Fed’s exit strategy:
The participants’ discussion touched on various aspects of the exit strategy principles and policy normalization more generally, including the size and composition of the SOMA portfolio in the longer run, the use of a range of reservedraining tools, the approach to sales of securities, the eventual framework for policy implementation, and the relationship between the principles and the economic thresholds in the Committee’s forward guidance on the federal funds rate. The broad principles adopted almost two years ago appeared generally still valid, but developments since then—including the change in the size and composition of SOMA asset holdings—suggested a need for greater flexibility regarding the details of implementing policy normalization, particularly because those details would appropriately depend at least in part upon future economic and financial developments.
The reference to a possible tapering of asset purchases “as early as the June meeting” along with Bernanke’s comments on Wednesday will lead to speculation that the Fed is preparing to scale back its LSAPs relatively soon, perhaps in the second half of the year. But these sentiments can change quickly.