Five years ago, few really cared about the formal meeting minutes of the Federal Reserve. How things change. Pundits, investors and politicians want to crawl inside the minds of the FOMC (Federal Open Market Committee), who govern the Federal Reserve, to get an understanding of the ultimate direction of American monetary policy.
And the FOMC is now in an public relations campaign to be seen as the open and benevolent rulers of monetary policy. They provide significantly more context in their minutes (now up to 20 pages of context).
Highlights of their November 2–3, 2010 meeting minutes are discussed in this article.
Quantitative Easing (QE):
The FOMC authorized a $600 billion expansion of their portfolio purchasing treasuries with maturities in the 2 to 10 year range at the rate of $75 billion per month. I was on vacation when QE started kicking in. I knew the Fed was replacing expiring paper in its portfolio with treasuries, but did not grasp that most all new purchases into the portfolio would be in the same 2 to 10 year range as the $600 billion expansion of the portfolio.
The Open Market Desk at the Federal Reserve Bank of New York purchased a total of about $65 billion of Treasury securities since the Committee decided, on August 10, to begin reinvesting such principal payments. Purchases were concentrated in nominal Treasury securities with maturities of 2 to 10 years, though some shorter-term and some longer-term securities were purchased along with some Treasury inflation-protected securities (TIPS).
The treasuries were going to be purchased at the rate of $75 billion per month. There has been much speculation of how this rate of purchase was established.
The Desk [of the System Open Market Account] judged that if it continued reinvesting principal payments from the Federal Reserve System’s holdings of agency debt and agency MBS in longer-term Treasury securities, then it could purchase additional longer-term Treasury securities at a pace of about $75 billion per month while avoiding disruptions in market functioning.
It is implied that the $75 billion per month rate plus the replacement securities for those that have matured is all the market could bear right now. But the real question was WHY the FOMC decided to entertain this round of QE.
In the weeks following the [September] FOMC meeting, Federal Reserve communications, along with economic data releases that continued to point to a tepid economic outlook, appeared to reinforce market expectations that additional policy accommodation would be forthcoming in the near term.
So the answer to why QE2 is that the market expected the Fed to act. Yes, it was the market that demanded QE2.
Broad U.S. stock price indexes rose, on balance, over the intermeeting period, reflecting investor expectations of further monetary policy accommodation and better-than-expected third-quarter earnings news; option-implied volatility on the S&P 500 index was little changed.
The discussion of QE was scattered throughout the minutes. Other reasons for QE surfaced.
……….Most participants judged that a program of purchasing additional longer-term securities would put downward pressure on longer-term interest rates and boost asset prices; some observed that it could also lead to a reduction in the foreign exchange value of the dollar.
Could lead to a devaluation of the dollar? It seems like the majority of the Fed was counting on it through inflation.
Most expected these changes in financial conditions to help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with the Committee’s mandate. In addition, several participants argued that the stimulus provided by additional securities purchases would help protect against further disinflation and the small probability that the U.S. economy could fall into persistent deflation—an outcome that they thought would be very costly.
Yet a minority warned of danger.
Some participants, however, anticipated that additional purchases of longer-term securities would have only a limited effect on the pace of the recovery; they judged that the economy’s slow growth largely reflected the effects of factors that were not likely to respond to additional monetary policy stimulus and thought that additional action would be warranted only if the outlook worsened and the odds of deflation increased materially. Some participants noted concerns that additional expansion of the Federal Reserve’s balance sheet could put unwanted downward pressure on the dollar’s value in foreign exchange markets.
The minutes proclaim that economic growth between the September and November meetings were in line with their expectations – painfully slow growth.
Participants variously noted a number of factors that were restraining growth, including low levels of household and business confidence, concerns about the durability of the economic recovery, continuing uncertainty about the future tax and regulatory environment, still-weak financial conditions of some households and small businesses, the depressed housing market, and waning fiscal stimulus. Although participants considered it quite unlikely that the economy would slide back into recession, some noted that continued slow growth and high levels of resource slack could leave the economic expansion vulnerable to negative shocks.
Various glimpses of how the FOMC members see the economy.
…….In the absence of such shocks, and assuming appropriate monetary policy, participants’ economic projections generally showed growth picking up to a moderate pace and the unemployment rate declining somewhat next year. Participants generally expected growth to strengthen further and unemployment to decline somewhat more rapidly in 2012 and 2013.
………With respect to business spending, contacts generally reported that they were investing to reduce costs but were refraining from adding workers or expanding capacity in the United States. Energy producers were an exception. Participants observed that firms had generated rising profits, but that business contacts indicated those gains largely reflected cost-cutting rather than top-line growth in revenues. A number of businesses continued to report that they were holding back on hiring and capital spending because of uncertainty about future taxes, health-care costs, and regulations. But concerns about actual and anticipated demand also were important factors limiting investment and hiring. Firms continued to report strong foreign demand for their products, particularly from Asia.
Fed watchers await these semi-annual meeting minutes where the participants get to forecast the economic future.
As expected, the GDP forecasts have been reduced slightly, and the unemployment forecasts raised slightly. It is interesting that inflation forecasts have been increased – could QE2 have played any part in this new outlook?