The minutes from the December FOMC meeting, released this afternoon, contained an interesting twist.
Even though the Fed announced a particularly dovish policy shift with the introduction of the "Evans rule" at the conclusion of the December meeting, the minutes revealed an increasingly hawkish tone on the central bank's quantitative easing programs.
The Evans rule ties the Fed's interest rate guidance to quantitative labor market thresholds – specifically, a 6.5 percent unemployment rate. In other words, the Committee won't consider raising interest rates until headline unemployment falls to 6.5 percent from its current level at 7.7 percent.
Most project that unemployment won't fall to 6.5 percent until the end of 2014 or sometime in 2015; thus, the Fed's accommodative stance – at least with regard to interest rate policy – is expected to be the status quo for a long time yet.
The minutes from the December meeting, however, suggest that the Federal Reserve is becoming increasingly more hawkish when it comes to the central bank's other stimulus tool of choice – asset purchases, also known as quantitative easing.
Below is the key passage from the minutes:
Various members stressed the importance of a continuing assessment of labor market developments and reviews of the program's efficacy and costs at upcoming FOMC meetings.
In considering the outlook for the labor market and the broader economy, a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013, while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases.
Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted.
This language lends to the argument that the Fed may actually be moving toward tightening policy.
If that is the case, you can bet the upcoming employment-related data releases are going to be watched a lot more closely now that the Fed has essentially said it could consider scaling back asset purchases as soon as this year.
Deutsche Bank's Chief U.S. Economist, Joe LaVorgna, summed it up nicely in a brief note following the release this afternoon: "In other words, this should significantly amplify the financial market's sensitivity to upcoming economic data, particularly if we witness a spell of robust economic reports which could bring into question the perception of the Fed's exit strategy."
Tomorrow is a big one – the monthly nonfarm payrolls report, where we get an update on the unemployment rate – is due out at 8:30 AM ET. Follow the release LIVE on Money Game >
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