FOMC December 2010 Meeting Participants Insight into Treasury Yield Rise

We know the final conclusions of the FOMC (Federal Open Market Committee), who govern the Federal Reserve, from their meeting statement released on 14 December 2010.  But the beliefs of the meeting participants are not known until the meeting minutes are released.

Below are this author’s review of the highlights from the meeting minutes released today (January 4, 2011):

  • The FOMC were worried about lack of inflation – and believe rising energy prices will save the day:

As in earlier forecasts, the persistent wide margin of economic slack in the projection was expected to sustain downward pressure on inflation, but the ongoing stability in inflation expectations was anticipated to stem further disinflation. The staff anticipated that relatively rapid increases in energy prices would raise total consumer price inflation above the core rate in the near term, but that this upward pressure would dissipate by 2012.

  • Remember that this meeting occurred before the passage of the extension of the Bush tax cuts, but the participants believed that the legislation would be beneficial to the economy.

Indicators of production and household spending had strengthened, and the tone of the labor market was a little better on balance. The new fiscal package was generally expected to support the pace of recovery next year.  However, a number of factors were seen as likely to continue restraining growth, including the depressed housing market, employers’ continued reluctance to add to payrolls, and ongoing efforts by some households and businesses to delever. Moreover, the recovery remained subject to some downside risks, such as the possibility of a more extended period of weak activity and lower prices in the housing sector and potential financial and economic spillovers if the banking and sovereign debt problems in Europe were to worsen. In light of recent readings on consumer inflation, participants noted that underlying inflation had continued trending downward, but several saw the risk of deflation as having receded somewhat.

  • The participants think business conditions are better.

A number of participants noted that their business contacts had become more optimistic about the outlook for sales and production. Nonetheless, many contacts remained cautious about hiring and investment, with some reportedly concerned about the potential effects of government policies. The manufacturing, agriculture, and energy sectors showed particular signs of strength, and the high-tech sector appeared to be improving.  However, nonresidential construction remained very weak, apart from drilling and mining. It was noted that credit conditions had eased further, although nonfinancial corporations continued to hold very high levels of cash.

  • The participants point to several reasons for the increase in treasury yields.  The yields have been trending down in the last week, and this supports some of the participant’s beliefs.

Participants pointed to a number of factors that appeared to have contributed to the significant backup in yields, including an apparent downward reassessment by investors of the likely ultimate size of the Federal Reserve’s asset-purchase program, economic data that were seen as suggesting an improved economic outlook, and the announcement of a package of fiscal measures that was expected to bolster economic growth and increase the deficit over coming quarters.  It was noted that the backup in rates may have been amplified by year-end positioning, as well as by some reported mortgage-related hedging flows. A number of participants indicated that, because the backup in rates appeared to importantly reflect changes in investors’ expectations about the size of Federal Reserve asset purchases, the backup was consistent with purchases helping to keep longer-term yields lower than would otherwise be the case. Several meeting participants mentioned the communications challenges faced in conducting effective policy, including the need to clearly convey the Committee’s views while appropriately airing individual perspectives.

Overall the quality of this meeting minutes was poor – it repeated the same conclusions and discussions several times. The detail had minor conflicts such as in one paragraph inflation was not a worry, while in another paragraph inflation risks were discussed.  There was little new to be learned – and disappointing after the rich content of the previous meeting.

For Chairman Bernanke lovers and haters, there are out-takes from the recent 60 minutes interview available on the CBS website.

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