November 23rd, 2011
Econintersect: Looking into the minds of the members of the Federal Open Market Committee (FOMC) gives insights on how they view the economy. The November 2, 2011 meeting statement provided the actions taken, but the meeting minutes released yesterday provides the detailed discussion.
Econintersect has selected the quote of the day from the meeting minutes:
A few participants, however, mentioned the possibility that economic growth could be more rapid than currently expected, particularly if gains in output and employment led to a virtuous cycle of improvements in household balance sheets, increased confidence, and easier credit conditions.
Follow up:Note that the specific economic forecasts of the FOMC members were provided during the 02 November Bernanke press conference (news here - this includes graphs). The FOMC establishes the monetary policy of the USA.
Econintersect had reported with the release of the meeting statement:
There was discussion about possible further easing of monetary policy, which would amount to further quantitative easing, a QE 3 of some sort. One member, Charlie Evans of the Chicago Fed actually dissented in favor of more QE immediately. No one expressed any thoughts about tightening.
An article at Forbes added that Bernanke seems to have strong support from the FOMC. From Forbes:
…. those who were against further policy accommodation, Plosser, Kocherlakota, and Fisher, have accepted the FOMC’s, and therefore Bernanke’s decision and won’t oppose it.
On the point of dissenters, Charlie Evans, the lone dissenter at the November meeting, was actually pushing for further accommodation, putting him closer to the Bernanke camp than those opposed to Operation Twist. All of these add up to a Chairman who, despite an impressive amount of dissent, still holds the monetary policy reins.
Here is a parsed synopsis of meeting minutes discussions:
On the economy in general:
In their discussion of the economic situation and outlook, meeting participants regarded the information received during the intermeeting period as indicating that economic growth had strengthened somewhat in the third quarter, reflecting in part a reversal of temporary factors that had weighed on the economic recovery in the first half of the year.
...... final demand from consumers and businesses was stronger than had been expected at the time of the September FOMC meeting. Nonetheless, most participants anticipated that the pace of economic growth would remain moderate over coming quarters.
...... Regarding their overall outlook for economic activity, participants generally agreed that, even with the positive news received over the intermeeting period, the most probable outcome was a moderate pace of economic growth over the medium run with only a gradual decline in the unemployment rate. While some factors were seen as likely to support growth going forward— such as pent-up demand, improvements in household and business balance sheets, and accommodative monetary policy—participants observed that the pace of economic recovery would likely continue to be held down for some time by persistent headwinds.
...... Participants also discussed the events surrounding the bankruptcy filing of MF Global Holdings Ltd. and saw the financial stability implications of this development as limited to date.
With longer-term inflation expectations remaining stable, the effects of earlier increases in the prices of energy and other commodities continuing to wane, and low levels of resource utilization restraining increases in prices and wages, most participants anticipated that inflation would settle, over coming quarters, at or below levels they judged to be most consistent with their dual mandate.
....... Nonetheless, some participants noted that core inflation had not come down as quickly or by as much as they had expected in light of the reduction in commodity prices, perhaps suggesting that the level of potential output was lower than had been thought.
...... U.S. inflation had been influenced relatively more by commodity price fluctuations in recent years; because commodity prices reflect global economic conditions, U.S. inflation might be less affected by domestic factors and more linked to the global outlook than in the past.
What Economic Headwinds are Seen:
While they believed that the economic recovery would continue to be supported by accommodative monetary policy, ongoing improvements in households’ and businesses’ financial positions, and pent-up demand for goods and services, a number of factors were seen as likely to continue to restrain the pace of economic growth. Those included:
- persistent weakness in the labor and housing markets,
- still-tight credit conditions for many households and small businesses,
- low consumer and business confidence,
- fiscal consolidation at all levels of government,
- and elevated volatility in financial markets.
....... that the recent pickup in consumer spending outpaced growth in after-tax incomes and was accompanied by a decline in the saving rate, raising doubts about its sustainability unless income growth picked up.
...... The housing sector continued to be depressed, and some meeting participants indicated that the elevated supply of available homes and the overhang of foreclosures, together with limited access to mortgage credit, were continuing to put downward pressure on house prices and housing construction.
...... Liquidity in many markets worsened, in part because financial institutions more reliant on short-term funding markets reportedly pulled back from risk-taking and became somewhat less willing to make markets.
...... very low interest rates were negatively affecting pension funds and the profitability of the life insurance industry.
....... spillovers to U.S. financial markets and institutions, and so to the broader U.S. economy, if the European debt and banking crisis were to worsen significantly.
...... participants noted the risk of a larger-than-expected fiscal tightening and the possibility that structural problems in the housing market had attenuated the transmission of monetary policy actions to the real economy.
...... It was also noted that the extended period of highly accommodative monetary policy could eventually lead to a buildup of financial imbalances.
What Positive Signs were seen in the Economy:
...... production in the manufacturing, agriculture, and energy sectors continued to increase, and the auto sector was rebounding from earlier supply chain disruptions.
...... businesses in a number of regions reported ongoing capital investment to increase productivity. Input cost pressures were said to have abated somewhat, while labor costs remained subdued.
...... credit costs were low, and profits and balance sheets at nonfinancial corporations were healthy, with many firms continuing to hold very high levels of cash.
...... the capital and liquidity positions of U.S. banks had strengthened in recent quarters and that the credit quality of loans to businesses and households had improved further.
Despite some signs of improvement of late, the available indicators pointed to continued weakness in overall labor market conditions, and the unemployment rate remained elevated. Some participants suggested that the persistently high level of unemployment reflected the impact of structural factors, including mismatches between the skills of the unemployed and the skills demanded in sectors in which jobs were currently available. Consistent with this view, some business contacts reportedly were concerned about the low quality of many job applicants, while other contacts noted that workers with some specialized skills continued to be in short supply. However, other participants indicated that such concerns were not new and that much of the current elevated level of unemployment reflected cyclical factors, with one pointing to the lack of wage pressures as evidence. As a result, they expected that unemployment would fall back as the economy recovered. Some participants again warned that the exceptionally high level of long-term unemployment could ultimately lead to permanent negative effects on the skills and employment prospects of the unemployed.