The most important aspect of reading the September 21, 2010 Federal Reserve FOMC meeting minutes is trying to get your mind around what they believe – and what they intend to do next.
These formal meeting minutes added little context to the brief meeting statement issued on September 21 which stated in part:
The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”
It has been the meaning of “additional accommodation” which has been on center stage with talking heads and blogs – and put a fire under the markets and gold. Most pundits believe Quantitative Easing Rev 2.0 is in the works, with the Fed soon to expand their balance sheet. Guesses have ranged from expansion of several hundred billion to over $1 trillion.
We now know there was one specific domestic policy directive issued in this September 21st meeting to maintain the Fed’s balance sheet at $2 trillion which stated:
“The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to maintain the total face value of domestic securities held in the System Open Market Account at approximately $2 trillion by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability.”
This was not much of a secret as the NY Fed has announced programs to fill the directive. But whatever additional accommodation will be still remains a mystery. There are just a few information scraps thrown about.
Many participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate or if inflation continued to come in below levels consistent with the FOMC’s dual mandate, it would be appropriate to provide additional monetary policy accommodation. However, others thought that additional accommodation would be warranted only if the outlook worsened and the odds of deflation increased materially.
This suggests that the FOMC intends to wait to make any “accommodation” decisions at least until the next meeting.
Meeting participants discussed several possible approaches to providing additional accommodation but focused primarily on further purchases of longer-term Treasury securities and on possible steps to affect inflation expectations. Participants reviewed the likely benefits and costs associated with a program of purchasing additional longer-term assets—with some noting that the economic benefits could be small in current circumstances— as well as the best means to calibrate and implement such purchases.
The FOMC believes in advance that the economic benefits of further QE will be small. The FOMC continues to remain focused in stimulating aggregate demand (making consumers want to buy). However, even reading between the lines with magnifying glasses did not offer any clues what accommodation the FOMC was considering.
The FOMC did signal that they were abandoning inflation targets, as well as now targeting GDP growth levels their monetary policy was to achieve:
Participants noted a number of possible strategies for affecting short-term inflation expectations, including providing more detailed information about the rates of inflation the Committee considered consistent with its dual mandate, targeting a path for the price level rather than the rate of inflation, and targeting a path for the level of nominal GDP. As a general matter, participants felt that any needed policy accommodation would be most effective if enacted within a framework that was clearly communicated to the public. The minutes of FOMC meetings were seen as an important channel for communicating participants’ views about monetary policy.
So there we have it. The FOMC will communicate with meeting minutes what they will be doing. The September 21st meeting minutes communicated nothing except to maintain the decaying Fed balance sheet at $2 trillion.
The uncertainty over the type and amount of Fed accommodation continues.