December 2011 FOMC Meeting Minutes: Highlighting the Good and Ugly

January 3rd, 2012
in econ_news

Econintersect: Looking into the minds of the members of the Federal Open Market Committee (FOMC) gives insights on how they view the economy. The 13 December, 2011 meeting statement provided the actions taken, but the meeting minutes released today provides the detailed discussion.

Econintersect noted from the meeting statement:

.......... meeting concluded today with the members not seeing much change domestically in economic conditions - and continued to see significant risk to the USA economy due to the global financial crisis.

No new programs were announced - and the FOMC voted to continue doing whatever they were doing.

These meeting minutes included coverage of the 28 November 2011 video conference where currency swap lines were openned or extended to Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank.

Follow up:

Also discussed in these minutes were incorporation of participants' projections of appropriate future monetary policy into the Summary of Economic Projections (SEP), which the FOMC releases four times each year.

At the conclusion of their discussion, participants decided to incorporate information about their projections of appropriate monetary policy into the SEP beginning in January. Specifically, the SEP will include information about participants' projections of the appropriate level of the target federal funds rate in the fourth quarter of the current year and the next few calendar years, and over the longer run; the SEP also will report participants' current projections of the likely timing of the first increase in the target rate given their projections of future economic conditions. An accompanying narrative will describe the key factors underlying those assessments as well as qualitative information regarding participants' expectations for the Federal Reserve's balance sheet. A number of participants suggested further enhancements to the SEP; the Chairman asked the subcommittee to explore such enhancements over coming months.

The FOMC establishes the monetary policy of the USA.  Here is a parsed synopsis of meeting minutes discussions:

On the economy in general:

Members viewed the information on U.S. economic activity received over the intermeeting period as suggesting that the economy was expanding moderately. While overall labor market conditions had improved some in recent months, the unemployment rate remained elevated relative to levels that the Committee anticipated would prevail in the longer run. Inflation had moderated, and longer-term inflation expectations remained stable. However, available indicators pointed to some slowing in the pace of economic growth in Europe and in some emerging market economies. Members continued to expect a moderate pace of economic growth over coming quarters, with the unemployment rate declining only gradually toward levels consistent with the Committee's dual mandate. Strains in global financial markets continued to pose significant downside risks to economic activity. Members also anticipated that inflation would settle, over coming quarters, at levels at or below those consistent with the dual mandate.

........... In their discussion of the economic situation and outlook, meeting participants agreed that the information received since their previous meeting indicated that economic activity was expanding at a moderate rate, notwithstanding some apparent slowing in global economic growth. Consumer spending continued to advance, but business fixed investment appeared to be decelerating, and home sales and construction remained at very low levels. Labor market conditions improved some in recent months, but the unemployment rate remained elevated despite a noticeable drop in November. Inflation moderated from the rates earlier in the year, and longer-term inflation expectations remained stable.

Regarding the economic outlook, participants continued to anticipate that economic activity would expand at a moderate rate in the coming quarters and that, consequently, the unemployment rate would decline only gradually.

.......... In discussing the household sector, meeting participants generally commented that consumer spending in recent months had been stronger than expected, and several reported cautious optimism among some of their business contacts about prospects for the holiday shopping season. A few participants thought that the recent strength in motor vehicle sales and other consumer spending could reflect pent-up demand from households for goods and services, and so thought that it might persist for a time. However, others noted that real disposable personal income had weakened and that households remained pessimistic about their income prospects and uncertain about the economic outlook. As a result, a number of those participants suggested that the recent stronger pace of consumer spending might not be sustained. Moreover, some participants mentioned that households were likely still adjusting to the loss of wealth over the past few years, which would weigh on consumer spending going forward. Participants generally saw few signs of recovery in the housing market, with house prices continuing to decline in most areas and the overhang of foreclosed and distressed properties still substantial. Several participants observed that the ongoing weakness in the housing market came despite low borrowing rates and government initiatives to resolve problems in the foreclosure process. However, one participant noted that some homebuilders were reporting that land prices were edging up and that financing was available from nontraditional sources, suggesting that conditions in the housing market could be improving.

Reports from business contacts indicated that, in addition to the rise in consumer spending, activity in the manufacturing, energy, and agriculture sectors continued to advance in recent months. Nonetheless, businesses generally reported that they remained cautious regarding capital spending and hiring because of a high level of uncertainty about the economic outlook and the political environment. In particular, some contacts raised concerns about the uncertain fiscal outlook in the United States or the possible drag on sales and production from an economic slowdown abroad, while others cited uncertainty about the cost implications of potential changes in regulatory policies. Several participants noted that their contacts had ready access to credit at attractive rates. However, some participants continued to view credit as tight, particularly in mortgage markets or among small businesses in their Districts that were facing difficulties meeting collateral requirements and obtaining bank loans.


On Inflation:

Participants observed that inflation had moderated in recent months as the effects of the earlier run-up in commodity prices subsided. Retail prices of gasoline had declined, and prices of non-oil imported goods had softened. In addition, labor compensation had risen only slowly, and productivity continued to rise. Some business contacts suggested that pricing pressures had diminished. Longer-run inflation expectations were still well anchored. Most participants anticipated that inflation would continue to moderate. Although some energy prices had recently increased, many participants judged that the favorable trends in commodity prices might persist in the near term, particularly in light of softer global activity, and one noted that expanded crop production, if realized, would hold down agricultural prices. More broadly, many participants judged that the moderate expansion in economic activity that they were projecting and the associated gradual reduction in the current wide margins of slack in labor and product markets would be consistent with subdued inflation going forward. Indeed, some expressed the concern that, with the persistence of considerable resource slack, inflation might run below mandate-consistent levels for some time. However, a couple of participants noted that the rate of inflation over the past year had not fallen as much as would be expected if the gap in resource utilization were large, suggesting that the level of potential output was lower than some current estimates. Some participants were concerned that inflation could rise as the recovery continued, and some business contacts had reported that producers expected to see an increase in pricing power over time. A few participants argued that maintaining a highly accommodative stance of monetary policy over the medium run would erode the stability of inflation expectations.

What Economic Headwinds are Seen:

The factors that participants cited as likely to restrain the pace of the economic expansion included an expectation that financial markets would remain unsettled until the fiscal and banking issues in the euro area were more fully addressed. Other factors that were expected to weigh on the pace of economic activity were the slowdown of economic activity abroad, fiscal tightening in the United States, high levels of uncertainty among households and businesses, the weak housing market, and household deleveraging. In assessing the economic outlook, participants judged that strains in global financial markets continued to pose significant downside risks. With the rate of increase in economic activity anticipated to remain moderate, most participants expected that inflation would settle over coming quarters at or below levels consistent with their estimates of its longer-run mandate-consistent rate.

.......... Meeting participants observed that financial markets remained volatile over the intermeeting period in large part because of developments in Europe. Participants noted the recent moves by the European authorities to strengthen their commitment to fiscal discipline and to provide greater resources to backstop sovereign debt issuance. But many anticipated that further efforts to implement and perhaps to augment these policies would be necessary to fully resolve the area's fiscal and financial problems and commented that financial markets would remain focused on the situation in Europe as it evolves. It was noted that the changes to the central bank currency swap lines announced in late November helped to ease dollar funding conditions facing European institutions, but such conditions were still strained. However, participants generally saw little evidence of significant new constraints on credit availability for domestic borrowers. The balance sheets of most U.S. banks appeared to have improved somewhat, and domestic banks reported increases in commercial lending, even as some European lenders were pulling back. Several participants commented on strains affecting some community banks, which reportedly had led to tighter credit conditions for their small business clients.

Areas of conflict between meeting participants:

With regard to the forward guidance to be included in the statement to be released following the meeting, several members noted that the reference to mid-2013 might need to be adjusted before long. A number of members noted their dissatisfaction with the Committee's current approach for communicating its views regarding the appropriate path for monetary policy, and looked forward to considering possible enhancements to the Committee's communications. For now, however, the Committee agreed to reiterate its anticipation that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.  A number of members indicated that current and prospective economic conditions could well warrant additional policy accommodation, but they believed that any additional actions would be more effective if accompanied by enhanced communication about the Committee's longer-run economic goals and policy framework. A few others continued to judge that maintaining the current degree of policy accommodation beyond the near term would likely be inappropriate given their outlook for economic activity and inflation, or questioned the efficacy of additional monetary policy actions in light of the nonmonetary headwinds restraining the recovery. For this meeting, almost all members were willing to support maintaining the existing policy stance while emphasizing the importance of carefully monitoring economic developments given the uncertainties and risks attending the outlook. One member preferred to undertake additional accommodation at this meeting and dissented from the policy decision.

On Employment:

A number of recent indicators showed some improvement in labor market conditions:  Payroll employment had posted moderate gains for five months, new claims for unemployment insurance had drifted lower, and the unemployment rate had turned down. One participant noted that the series of upward revisions to the initial estimates of payroll employment in recent months was an encouraging sign of sustained hiring, although several participants remarked that they saw the labor market as still improving only slowly. Others indicated that because part of the recent decline in the jobless rate was associated with a reduction in labor force participation, the drop in the unemployment rate likely overstated the overall improvement in the labor market.  Moreover, unemployment, particularly longer-term unemployment, remained high, and the number of involuntary part-time workers was still elevated. Some participants again expressed concern that the persistence of high levels of long-duration unemployment and the underutilization of the workforce could eventually lead to a loss of skills and an erosion of potential output.  Another participant suggested that the unemployment rate was a more useful indicator of cyclical labor market developments than the level of employment relative to the size of the population, which was more likely to be influenced by structural changes in labor demand and supply.  Participants expressed a range of views on the current extent of slack in the labor market. It was noted that because of factors including ongoing changes in the composition of available jobs and workers' skills, some part of the increase in unemployment since the beginning of the recession had been structural rather than cyclical. Others pointed out that the very modest increases in labor compensation of late suggested that underutilization of labor was still significant.


28 November Currency Swap Video Conference:

The Federal Reserve voted with one dissent to "extend the existing temporary reciprocal currency arrangements ("swap arrangements") for the System Open Market Account with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. In addition, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to enter into additional swap arrangements for the System Open Market Account with the Bank of Canada, Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank to support the provision by the Federal Reserve of liquidity in Canadian dollars, British pounds, Japanese yen, euros, and Swiss francs."

In recent weeks, financial markets appeared to have become increasingly concerned that a timely resolution of the European sovereign debt situation might not occur despite the measures that authorities there announced in October; pressures on European sovereign debt markets had increased, and conditions in European funding markets had deteriorated appreciably. The greater financial stress appeared likely to damp economic activity in the euro area and could pose a risk to the economic recovery in the United States.

Meeting participants discussed a range of considerations surrounding the proposed changes to the swap arrangements. Most participants agreed that such changes would represent an important demonstration of the commitment of the Federal Reserve and the other central banks to work together to support the global financial system. Some participants indicated that, although they did not anticipate that usage would necessarily be heavy, they felt that lower pricing on the existing swap lines could reduce the possible stigma associated with the use of the lines by financial institutions borrowing dollars from the foreign central banks, and so would contribute to improved functioning in dollar funding markets in Europe and elsewhere. A few noted that the risks associated with the swap lines were low because the Federal Reserve's counterparties would be the foreign central banks themselves, and the foreign central banks would be responsible for the loans to banks in their jurisdictions. However, some participants commented that the proposed changes to the swap lines would not by themselves address the need for additional policy action by European authorities. Several participants questioned whether the changes to the swap lines were necessary at this time and worried that such changes could be seen as suggesting greater concern about financial strains than was warranted. It was also noted that the proposed reduction in pricing of the existing swap arrangements could put the cost of dollar borrowing from foreign central banks below the Federal Reserve's primary credit rate and that non-U.S. banks might be perceived to have an advantage in meeting their short-term funding needs as a result. However, U.S. banks did not face difficulties obtaining liquidity in short-term funding markets, and some participants felt that a cut in the primary credit rate at the present time might incorrectly be seen as suggesting concern about U.S. financial conditions.


source: Federal Reserve [full text of meeting minutes]


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