The FOMC Minutes overnight showed a front-of-mind intent to plan its exit from QE:
After the policy vote, participants began a review of the exit strategy principles that were published in the minutes of the Committee’s June 2011 meeting. Those principles, which the Committee issued to clarify how it intended to normalize the stance and conduct of monetary policy when doing so eventually became appropriate, included broad principles along with some details about the timing and sequence of specific steps the Committee expected to take. 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 reserve-draining 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. Also, because normalization still appeared to be well in the future, the Committee might wish to wait and acquire additional experience to inform its plans. In particular, the process of normalizing policy could yield information about the most effective framework for implementing monetary policy in the longer run, and thus about the appropriate size of the SOMA portfolio and level of reserve balances. In addition, several participants raised the possibility that the federal funds rate might not, in the future, be the best indicator of the general level of short-term interest rates, and supported further staff study of potential alternative approaches to implementing monetary policy in the longer term and of possible new tools to improve control over short-term interest rates.
Views differed regarding whether the best course at this point would be to simply acknowledge that certain components of the June 2011 principles had been overtaken by events or rather to formally revise the principles. Acknowledging that the principles need to be updated would help avoid possible confusion regarding the Committee’s intentions; waiting to update the principles would allow the Committee to obtain additional information before revising them. It was also mentioned that the public’s understanding of the likely exit process might not be improved if the Committee issued only a set of broad principles without providing detailed information on the steps anticipated for normalization. However, issuing revised principles relatively soon could give the public additional confidence that the Committee had the tools and a plan for eventually normalizing the conduct of policy. Moreover, one participant stressed that the Committee’s ability to provide forward guidance about the normalization process was a key monetary policy tool, and revised principles would permit use of that tool to help adjust the stance of policy. Participants emphasized that their review of the June 2011 exit strategy principles did not suggest any change in their views about the economic conditions that would eventually warrant beginning the process of normalizing the stance of monetary policy. At the conclusion of the discussion, the Chairman directed the staff to undertake additional preparatory work on this issue for Committee consideration in the future.
In addition, in his testimony, Bernanke said the following:
This may have spooked markets a little but given the role the stock market is playing this recovery, that is, it is the recovery, then I think it fair to say that the economy is unlikely to be able to run ahead of stock prices and cause the Fed to move. In short, I’m saying the Fed will reduce purchases at a pace that does not hit the stock market.
That does not mean, as Goldman argued yesterday, that there will be no tapering and stocks will rise to the moon. It means tapering will be at a pace stocks can handle. That could just as easily mean the big rally is over, even if stocks can hold current levels.
