October 12th, 2011
Econintersect: The FOMC meeting statement announced that Operation Twist was underway with three FOMC members voting against twisting. Today, the meeting minutes were released which on the surface did not reveal much controversy.
The members pretty much saw the economy the same way:
In their discussion of the economic situation and outlook, meeting participants agreed that the information received during the intermeeting period indicated that economic growth remained slow but did not suggest a contraction in activity.......... Participants saw considerable uncertainty surrounding the outlook for a gradual pickup in economic growth. It was again noted that the cyclical impetus to economic expansion appeared to be weaker than in past recoveries, but that the reasons for the weakness were unclear, contributing to greater uncertainty about the economic outlook. Several commented that, with households and businesses seeking to reduce leverage rather than to borrow and with housing markets in distress, some of the normal mechanisms through which monetary policy actions are transmitted to the real economy appeared to be attenuated. Many participants saw significant downside risks to economic growth........ They generally judged that risks to the growth outlook, including strains in global financial markets, were significant and tilted to the downside; moreover, slow growth left the recovery more vulnerable to negative shocks.
They saw the labor market the same way:
Recent indicators pointed to continuing weakness in overall labor market conditions, and the unemployment rate remained elevated. Inflation appeared to have moderated since earlier in the year as prices of energy and some commodities declined from their peaks, but inflation had not yet come down as much as participants had expected earlier this year........
Even after adjusting for the effects of strikes on reported payrolls, the employment report for August showed weak job gains. Moreover, both the average workweek and aggregate hours worked declined. Contacts reported that slower growth, depressed business confidence, and uncertainty about the economic outlook were restraining hiring as well as capital investment; many also cited uncertainty about regulatory and tax policies as contributing to businesses’ reluctance to spend. Some business contacts reported that their firms had made contingency plans to reduce output and employment if demand for their products were to turn down.
They saw the consumer the same way:
Low confidence, continuing efforts to repair balance sheets, and heightened caution in the face of an uncertain economic environment were seen as factors likely to weigh on household spending. Several participants pointed to depressed home prices and financial constraints, including still-tight credit conditions for many households, as also likely to restrain consumer spending for a time.
They even saw business conditions similarily:
Business sentiment had worsened, seemingly in response to weaker economic prospects and increased downside risks to the outlook for U.S. and global growth.
Agreeing on reasons (and therefore solutions) for the bad dymanics became more divided:
Participants generally agreed that sluggish job growth and the elevated unemployment rate reflected both weak demand for goods and services and a mismatch between the characteristics of the unemployed and the needs of the employers that currently have jobs available, but they had varying views about the relative importance of these two factors. Many participants judged that weak demand was of most importance, while a few argued that structural and geographic mismatches were key. A few commented that business contacts reported receiving large numbers of applications for relatively low-skilled positions but having difficulty finding and hiring candidates for some highly skilled positions. Several participants again noted that the exceptionally high level of long-duration unemployment could lead to permanent negative effects on the skills and employment prospects of those affected and so reduce the economy’s longerrun productive potential.
Participants noted that financial markets were volatile over the intermeeting period and that financial conditions were strained at times, as investors reacted to the incoming economic data and to news about European fiscal and financial developments. Several participants argued that broader financial conditions had become less accommodative over the intermeeting period: Risk spreads had widened appreciably, likely reflecting a reduced willingness of investors to bear risk, a weaker outlook for growth in the United States and globally, and greater uncertainty about economic prospects.
Many participants judged that the risks to the outlook for inflation were roughly balanced. Some saw medium-run inflation risks as tilted to the downside, in light of persistent resource slack; some others argued that the accommodative stance of monetary policy and the upward trend in measures of core inflation this year suggested inflation risks were tilted to the upside. Participants generally judged that there was relatively little risk of deflation.
Most members also supported a change in the Committee’s reinvestment policy. To help support conditions in mortgage markets, the Committee decided to reinvest principal received from its holdings of agency debt and agency MBS in agency MBS rather than continuing to reinvest in longer-term Treasury securities as had been the Committee’s practice for more than a year. The effect of this change will be to keep the SOMA’s holdings of agency securities at an approximately constant level; under the previous practice, those holdings were declining on an ongoing basis. This change in reinvestment policy was expected to help reduce the spread between yields on mortgagebacked securities and those on comparable-maturity Treasury securities seen this year and so contribute to lower mortgage rates.
........ most members agreed that the revisions to the economic outlook warranted some additional monetary policy accommodation to support a stronger recovery and to help ensure that inflation, over time, was at a level consistent with the Committee’s dual mandate. While they recognized that monetary policy alone could not completely address the economy’s ills, most members judged that additional accommodation could contribute importantly to better outcomes in terms of the Committee’s dual mandate of maximum employment and price stability. Those viewing greater policy accommodation as appropriate at this meeting generally supported a maturity extension program that would combine asset purchases and sales to extend the average maturity of securities held in the SOMA without generating a substantial expansion of the Federal Reserve’s balance sheet or reserve balances. Specifically, those members supported a program under which the Committee would announce its intention to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. They expected this program to put downward pressure on longer-term interest rates and to help make broader financial conditions more accommodative. While the scale of such a maturity extension program was necessarily limited by the amount of shorter-term securities in the SOMA portfolio, most members judged the action as appropriate, given economic conditions and the outlook. Two members said that current conditions and the outlook could justify stronger policy action, but they supported undertaking the maturity extension program at this meeting as it did not rule out additional steps at future meetings. Three members concluded that additional accommodation was not appropriate at this time. The Committee discussed whether to specify the parameters of the maturity extension program by stating its intention to complete the full set of transactions by June 2012 or by stating that it would undertake these transactions at a specified monthly pace. Members saw benefits to both approaches: The former would provide the public greater clarity about the likely scale of the program and the latter might allow the Committee greater flexibility to adjust the scale of the program in response to unexpected economic developments. A majority favored the first approach. Members noted, however, that the Committee will continue to regularly review the size and composition of its securities hold-ings and that it is prepared to adjust those holdings as appropriate.
source: Federal Reserve