Fed Minutes Emphasize Transparency

The Fed released its latest Federal Open Market Committee (FOMC) meeting minutes today (link opens as PDF), hinting at a slow-and-steady path for monetary policy in the months to come. The minutes from the April 29-30 meeting noted that "[p]articipants generally agreed that starting to consider the options for normalization at this meeting was prudent, as it would help the Committee to make decisions about approaches to policy normalization and to communicate its plans to the public well before the first steps in normalizing policy become appropriate."

For investors and analysts, the FOMC's special emphasis on transparency and due notice came as a welcome note. While a pullback in quantitative easing, or an increase in the federal funds target rate, is a sign that the Fed believes markets can handle themselves and the future is bright, the action can still have a slight short-term negative effect, as markets recover from less "easy money" around.

The minutes also revealed more uncertainty about the Fed's "threshold numbers" that it has previously referenced as lines beyond which it would raise interest rates. Generally, the Reserve has stated it would like to see inflation rise to a 2% annual rate, and would like the unemployment rate to drop below 6.5%. Currently, inflation stands at 1.95% and the unemployment rate at 6.3% -- close enough to make many investors nervous about the Fed's next move.

US Unemployment Rate Chart

US Unemployment Rate data by YCharts

In its announcement on April 30, the Committee noted it was expanding beyond these metrics alone, considering "a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments." These latest minutes reveal an especially wide divide on the effects of long-term unemployment, hinting that the Committee's recent labor market optimism may be more fragile than previously expected.

The minutes noted:

A number of participants expressed skepticism about recent studies suggesting that long-term unemployment provides less downward pressure on wage and price inflation than short-term unemployment does ... a few participants pointed out that because of downward nominal wage rigidity during the recession, wage increases are likely to remain relatively modest for some time during the recovery, even as the labor market strengthens.

The article Fed Minutes Emphasize Transparency originally appeared on Fool.com.

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