August 30th, 2011
Econintersect: In reviewing the June 2011 Federal Open Market Committee meeting minutes, Econintersect noted they "could not produce one positive economic statement without a conditional statement." In the August meeting, not only were positive economic statements missing, but they produced the quote of the day:
Participants generally saw the degree of uncertainty surrounding the outlook for economic growth as having risen appreciably.
The minutes go on to say:
A couple noted that the cyclical impetus to economic expansion appeared to be weaker than it had been in past recoveries, but that the reasons for the weakness were unclear, contributing to greater uncertainty about the economic outlook.
Many participants also saw an increase in the downside risks to economic growth. While participants did not anticipate a downturn in economic activity, several noted that, with the recovery still somewhat tentative, the economywas vulnerable to adverse shocks. Potential shocks included the possibility of a more protracted period of weakness in household financial conditions, the chance of a larger-than-expected near-term fiscal tightening, and potential financial and economic spillovers if the situation in Europe were to deteriorate.
As we all know, the meeting statement (news here) stated that the policy action was federal funds rate at 0% to ¼% and to state that economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. Here were the discussion items:
- .....forward guidance about the likely path of monetary policy was seen as a possible way to reduce interest rates and provide greater support to the economic expansion; a few participants emphasized that guidance focusing solely on the state of the economy would be preferable to guidance that named specific spans of time or calendar dates.
- .....additional asset purchases could be used to provide more accommodation by lowering longer-term interest rates.
- .....increasing the average maturity of the System’s portfolio—perhaps by selling securities with relatively short remaining maturities and purchasing securities with relatively long remaining maturities—could have a similar effect on longer-term interest rates. Such an approach would not boost the size of the Federal Reserve’s balance sheet and the quantity of reserve balances.
- .....a reduction in the interest rate paid on excess reserve balances could also be helpful in easing financial conditions. In contrast, some participants judged that none of the tools available to the Committee would likely do much to promote a faster economic recovery, either because the headwinds that the economy faced would unwind only gradually and that process could not be accelerated with monetary policy or because recent events had significantly lowered the path of potential output. Consequently, these participants thought that providing additional stimulus at this time would risk boosting inflation without providing a significant gain in output or employment.
- ......Participants noted that devoting additional time to discussion of the possible costs and benefits of various potential tools would be useful, and they agreed that the September meeting should be extended to two days in order to provide more time.
As we know that there were objections to the meeting statement of setting a date for the maintaining of the low federal funds rate.
source: Federal Reserve