Unlike the previous minutes to the Federal Open Market Committee (FOMC) meetings, the August 10, 2010 minutes seemed more vague about where the economy was going. The FOMC is the board of directors for the Federal Reserve.
Worse, it seems they were unsure of the current economic conditions – and what the meaning of the data they were seeing. One example:
Revised national income and product account data showed that the contraction in aggregate output during the recent recession had been larger than previously reported. In particular, consumer spending had contracted more over the course of 2008 and the first half of 2009, and recovered less rapidly, than previously estimated, even as households’ after-tax incomes had increased more than shown by the earlier data. In combination, these revisions indicated that the personal saving rate had been higher and had risen somewhat more during the past three years than previously thought. Participants recognized that the implications of these new data for the outlook were unclear. On the one hand, the revised data might indicate that households have made greater progress in repairing their balance sheets than had been realized, potentially allowing stronger growth in consumer spending as the recovery proceeds. On the other hand, the revised data might signify that households are seeking to raise their net worth more substantially than previously understood, or to build greater precautionary balances in what they perceive to be a more uncertain economic environment, with the result that growth in consumer spending could remain restrained for some time.
This type of uncertainty of the FOMC participants means that they are guessing on what the data means. It is analogous to overhearing a bus driver saying he does not know what a road sign means but continues at full speed down the road.
Being an analyst, I can read the tea leaves of the housing market. Weak demand housing demand means home sales will fall further. This is confirmed by the National Association of Realtors (NAR) pending home sales data and the Mortgage Bankers Association new loan origination data which shows demand below any point this past decade. Yet this statement appears in the FOMC minutes:
Many participants noted that the protracted downturn in house prices and in residential investment seemed to have ended, although ups and downs in housing starts and home sales associated with the temporary tax credit for homebuyers made it difficult to be certain. A few commented that home sales and prices appeared to be edging up in their Districts. While recognizing that the housing sector likely had bottomed out, participants observed that large inventories of vacant and unsold homes, along with continuing foreclosures that would increase the number of houses for sale, likely would continue to damp residential construction, indicating that a sustained upturn from very low levels was not imminent.
The Fed is ignoring the drop in housing demand that is widely publicized. And for the first time in recent memory, the FOMC did a little Pontius Pilate washing his hands act.
Moreover, growth in Europe and Asia apparently remained solid, boosting U.S. Exports. Nonetheless, a continuation of strong foreign growth would require a pickup in private demand abroad to offset a decline in policy stimulus and a smaller boost from inventory investment. Several participants noted that the same shift in the sources of demand would need to take place in the United States: Waning fiscal stimulus on the part of the federal government and continuing retrenchment in spending by state and local governments would weigh on the economic recovery, and recent data raised questions as to whether private demand would strengthen enough to increase resource utilization.
This is a clear message to Congress for Stimulus 2.0. And while they were washing their hands, they made sure they were really clean.
The incoming data on the labor market were weaker than meeting participants had anticipated. Private sector payrolls grew sluggishly in recent months. The unemployment rate declined a bit, but that reflected a decrease in labor force participation rather than an increase in employment. Policymakers discussed a variety of factors that appeared to be contributing to the slow pace of job growth. A number of participants reported that business contacts again indicated that uncertainty about future taxes, regulations, and healthcare costs made them reluctant to expand their workforces. Instead, businesses had continued to meet growth in demand for their products largely through productivity gains and by increasing existing employees’ hours. Several participants suggested that structural factors such as mismatches between unemployed workers’ skills and the needs of employers with job openings, or unemployed workers’ inability to move to a new locale, were contributing to the elevated level and long average duration of unemployment. Other participants, while agreeing that such factors could restrain job growth and contribute to high rates of unemployment, noted that employment was lower than a year earlier and that job openings were only slightly above their lowest level in 10 years, indicating that few firms saw a need to add employees. Most participants viewed weak demand for firms’ outputs as the primary problem; they saw substantial scope for stronger aggregate demand for goods and services to spur employment in a wide range of industries.
The Fed is saying they are unable to control employment using monetary policy because of the existing laws and regulations of Congress and the Presidency.
There was no new insight in these minutes into the policy action of new treasury purchases to maintain the $2 trillion plus Federal Reserve balance sheets to replace the attrition in the MBS and Treasury portfolios.
We are lucky that few read these meeting minutes, or more investors would be headed to the doors. I find the FOMC reasonably uncertain about the future.