Econintersect: You get the feeling at times the FOMC meeting is scripted – as the minutes are little changed from the previous meeting minutes. The 01 August 2012 meeting statement presented the actions taken, including the usual whiff of quantitative easing (QE), but these meeting minutes released today provides the detailed discussion.
It appears that the FOMC members believe the economy is expanding moderately, but as stated in the previous meeting minutes, not as fast as previously envisioned. The following sums up the potential for more QE:
A few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth in employment and to ensure that the inflation rate would be at the Committee’s goal. Several others noted that additional policy action could be warranted if the economic recovery were to lose momentum, if the downside risks to the forecast became sufficiently pronounced, or if inflation seemed likely to run persistently below the Committee’s longer-run objective. The Committee agreed that it was prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability. A few members observed that it would be helpful to have a better understanding of how large the Federal Reserve’s asset purchases would have to be to cause a meaningful deterioration in securities market functioning, and of the potential costs of such deterioration for the economy as a whole.
Econintersect publishes below the views of the FOMC members, and does not go over the reports to the members. We are looking for a glimpse of insight into the minds of the FOMC members.
The short version of where the economy is:
…. participants agreed that the information received since the Committee’s previous meeting suggested that the economy had continued to expand moderately, though many noted that a variety of indicators showed smaller gains than had been anticipated. Growth in employment, in particular, appeared to have slowed in recent months, and the unemployment rate remained elevated. Business fixed investment had continued to advance, and household spending appeared to be rising at a somewhat slower pace than earlier in the year. There were further signs of improvement in the housing sector, but the level of activity remained very low. Volatility in financial markets increased over the intermeeting period, and investors’ appetite for riskier assets declined, likely in response to heightened fiscal and financial strains in Europe as well as some weaker-than-expected incoming data about the U.S. economy and foreign economies. Inflation had slowed somewhat, mainly reflecting the decline in the prices of crude oil and gasoline in recent months, and longer-term inflation expectations remained stable.
Participants generally interpreted the information that became available during the intermeeting period as suggesting that economic growth would most likely remain moderate over coming quarters and then pick up very gradually. Most participants saw the incoming information as indicating somewhat slower growth in total demand, output, and employment over coming quarters than they had projected in April, and most carried forward some of that downward revision to their projections of medium-term growth. However, some participants judged that the recent weakness in a variety of economic indicators was more likely to prove transitory, and thought that the outlook beyond this year was essentially unchanged. Reflecting the projected moderate pace of growth in production and employment, most participants anticipated that the unemployment rate would decline only slowly. A number of factors continued to be seen as likely to limit the economic expansion to a moderate pace in the near term; these included slow growth or even contraction in some major foreign economies, ongoing and prospective fiscal tightening in the United States, modest growth in household income, and–despite some recent signs of improvement–continued weakness in the housing sector. As in April, participants expected that most of the factors restraining economic expansion would ease over time, and so anticipated that the recovery eventually would gain strength. However, strains in global financial markets, which stemmed primarily from fiscal and banking concerns in Europe, had become more pronounced over the intermeeting period and continued to pose significant downside risks to the economic outlook; the possibility of a sharper-than-anticipated fiscal tightening in the United States also posed a downside risk. Looking beyond the temporary effects on inflation of this year’s fluctuations in oil and other commodity prices, almost all participants continued to anticipate that inflation over the medium-term would run at or below the 2 percent rate that the Committee judges to be most consistent with its statutory mandate. In one participant’s judgment, appropriate monetary policy would lead to inflation modestly greater than 2 percent for a time in order to bring unemployment down somewhat faster. Some participants indicated that they saw persistent slack in resource utilization as posing downside risks to the outlook for inflation; a few participants judged that the highly accommodative stance of monetary policy posed upside risks to the medium-term inflation outlook.
On the household sector:
….. participants noted that real personal consumption expenditures had continued to expand despite weak growth in real disposable income, but that the pace of expansion appeared to have slowed since earlier this year. A few participants expressed concern that slow growth in employment and low levels of consumer confidence would further restrain consumer spending. Many participants, however, said that business contacts had reported that consumer spending was holding up. Several observed that recent declines in gasoline prices would increase households’ real incomes and could boost consumer spending in coming quarters. More broadly, improving household balance sheets and a diminishing drag from household deleveraging were seen as likely to help support rising household expenditures over time.
Indicators of home sales, construction, and prices suggested some improvement in the housing sector. However, not all regions shared in the gains, and the sector remained depressed overall. Most participants anticipated that housing markets were likely to recover only slowly over time, in part because tight credit standards in mortgage lending meant that low mortgage rates were now generating less of a pickup in home sales and construction than had been the case during the recoveries from earlier recessions. A few participants were more sanguine about the potential for a sizable upturn in housing activity. Still, with residential investment currently a much smaller share of real GDP than during past recoveries, the housing sector seemed unlikely to contribute substantially to a stronger economic recovery.
Anecdotal evidence from business contacts indicated that activity in the energy and agriculture sectors continued to advance in recent months. Information from manufacturing and transportation firms was generally less optimistic than earlier in the year. There were a number of reports of slowing sales to Europe and Asia. Contacts in some parts of the country also indicated that firms had become more cautious in their hiring and investment decisions, with most capital investment being undertaken to improve productivity and reduce costs rather than to expand capacity. Some participants cited examples of business contacts saying that heightened uncertainty about future tax and regulatory policies had led them to put potential investment projects on hold until the uncertainty is resolved.
Exports helped support U.S. economic growth during the early months of this year. However, recent reports from some business contacts pointed to slowing exports to Europe and China, and several participants noted the risk that economic weakness in Europe or a more significant slowing in the pace of expansion in emerging markets in Asia could damp exports further. A couple of participants expressed the view that the direct effects on the U.S. economy stemming from slower economic growth abroad–effects that would be manifested through declining U.S. exports–would be noticeable but not large. However, another participant noted that recent appreciation of the dollar in foreign exchange markets would also contribute to reduced exports.
On fiscal policy:
Participants expected that fiscal policy would continue to be a drag on economic growth over coming quarters. They generally also saw the federal budget situation as a downside risk to the economic outlook: If an agreement was not reached to address the expiring tax cuts and scheduled spending reductions in current law, a sharp tightening of fiscal policy would occur at the start of 2013. A few participants reported hearing that defense contractors were making contingency plans to reduce their workforces if potential spending cuts go into effect; one reported that some firms already had begun to make such reductions. In contrast, it was noted that an agreement on a credible longer-term plan that put the federal budget on a sustainable path over the medium run in a way that removes the near-term fiscal risks to the recovery would help alleviate uncertainty, likely would have positive effects on consumer and business sentiment, and so could spur an increase in business investment and hiring.
The pace of improvement in labor market conditions diminished in recent months; in particular, growth in employment slowed. Job growth late last year and early this year was boosted by unusually mild winter weather; some slowing had been expected as weather became more normal during the spring, but the reported slowing was more substantial than many participants had anticipated. One participant noted that the apparent tension between strong employment growth and moderate output growth seen earlier in the year had been resolved more recently by slower job growth rather than faster output growth. Even so, average monthly growth in payrolls from January through May was in line with last year’s pace.
Meeting participants again discussed the extent of slack in labor markets. Some participants judged that the unemployment rate was being substantially boosted by structural factors such as mismatches between the skills of unemployed workers and those required for available jobs, a view that would imply less slack in labor markets than suggested by a simple comparison of the current unemployment rate to participants’ estimates of its longer-run normal level. A couple of participants said they would have expected inflation to slow noticeably if there were substantial and persistent slack. One implication of the view that there is relatively little slack is that providing more monetary stimulus would be likely to raise inflation above the Committee’s objective. Some other participants acknowledged that structural factors were contributing to unemployment, but said that, in their view, slack remained high and weak aggregate demand was the major reason that the unemployment rate was still elevated. These participants cited a range of evidence to support their judgment: the still-high fraction of workers who report working part-time jobs because they cannot find full-time work; research showing that job-finding rates among the long-term unemployed were somewhat higher in the recent past than a year earlier; anecdotal evidence to the effect that employers do not see long spells of unemployment as making applicants less attractive for most jobs; and reports that employers were receiving large numbers of applications for each opening and were being especially discriminating when filling vacant positions. Another participant pointed to research showing that, in many countries, inflation is less responsive to downward pressure from labor market slack when inflation is already low than when inflation is elevated, and to evidence that firms in the United States have been reluctant to cut nominal wages in recent years, as indications that sizable slack might not cause inflation to decline from its already low level. These arguments imply that slack in labor markets remains considerable and therefore that a reduction in the unemployment rate toward its longer-run normal level would not have much effect on inflation.
On monetary policy rules:
Many FOMC participants judged that overall financial conditions had become somewhat less supportive of growth in demand for goods and services. Investors’ concerns about the sovereign debt and banking situation in the euro area reportedly intensified during the intermeeting period, leading to higher risk spreads and lower prices for riskier assets including equities and to broad-based appreciation of the U.S. dollar on foreign exchange markets. In contrast, a few participants observed that the marked drop in yields on longer-term U.S. Treasury securities could provide some impetus to growth. Focusing more narrowly on the banking sector in the United States, it was noted that measures of credit quality for bank loans generally had continued to improve, that bank capital levels were quite high, and that banks had ample liquidity. Consumer and business loans were increasing, although credit standards remained tight and commercial and residential real estate lending were relatively weak. A few participants indicated that they were seeing signs that very low interest rates might be inducing some investors to take on imprudent risks in the search for higher nominal returns. Participants discussed the risk that strains in global financial markets and pressures on European financial institutions could worsen and spill over to parts of the domestic financial sector, and some noted the importance of undertaking adequate preparations to address such spillovers if they were to occur; it also was recognized that investor sentiment could improve and strains in global markets might ease. Several participants commented that it would be desirable to explore the possibility of developing new tools to promote more-accommodative financial conditions and thereby support a stronger economic recovery.
Measures of consumer price inflation declined over the intermeeting period, mainly reflecting reductions in oil and gasoline prices since earlier in the year. Several participants noted that they saw little if any evidence of price pressures, commenting that increases in labor costs continued to be subdued and that non-energy commodity prices had declined of late. With longer-run inflation expectations well anchored and the unemployment rate elevated, almost all participants anticipated that inflation in coming quarters and over the medium run would be at or below the 2 percent rate that the Committee judges to be most consistent with its mandate; several had revised down their inflation forecasts. Most participants viewed the risks to their inflation outlook as being roughly balanced. Some participants, however, saw persistent slack in resource utilization as weighting the risks to the outlook for inflation to the downside. In contrast, a few saw inflation risks as tilted to the upside; they generally were skeptical of models that rely on economic slack to forecast inflation and were concerned that maintaining the current highly accommodative stance of monetary policy over the medium run risked eroding the stability of inflation expectations, with a couple noting that large long-run fiscal imbalances also posed a risk.
Source: Federal Reserve