Econintersect: This is the meeting which culminated in QE3. The 24 October 2012 meeting statement presented the actions taken. What is interesting to this observer, is that the Fed’s Balance Sheet (which we report on weekly) – still has not expanded two months after QE3 was mandated.
It appears that the FOMC members believed the economy is expanding moderately, nothing has changed, and they will continue doing what they have been doing:
Participants generally saw the economic outlook as little changed, on balance, from their projections prepared for the September Summary of Economic Projections (SEP), agreeing that the pace of the economic recovery was likely to stay moderate over coming quarters …… Committee members generally agreed that their overall assessments of the economic outlook were little changed since their previous meeting. Accordingly, all but one member judged that maintaining the current, highly accommodative stance of monetary policy was warranted in order to foster a stronger economic recovery in a context of price stability.
Below in bold highlights is discussion about expansion of the asset buying program (likely operation twist) to expand the Fed’s balance sheet once all short term debt on the balance sheet has been replaced with longer term expiry debt.
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.
Participants’ Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants viewed the information received since the Committee met in September as indicating that economic activity continued to expand at a moderate pace. Employment was still rising slowly, and the unemployment rate remained elevated. Household spending advanced more quickly in recent months than during the spring, and housing activity showed further signs of improvement. However, business fixed investment slowed noticeably. Inflation recently picked up somewhat, reflecting higher energy prices, while longer-run inflation expectations remained stable.
Participants generally saw the economic outlook as little changed, on balance, from their projections prepared for the September Summary of Economic Projections (SEP), agreeing that the pace of the economic recovery was likely to stay moderate over coming quarters. The recent news on household spending, consumer sentiment, and the housing market was encouraging, and most participants expected that highly accommodative monetary policy would provide support for the recovery in the period ahead. However, many participants saw the uncertainty attending the unresolved U.S. fiscal situation and the ongoing fiscal and financial strains in the euro area as factors likely to restrain the pace of economic growth in coming months. Moreover, many participants cited significant downside risks to the outlook that might arise from more widespread weakness in global economic activity or an intensification of strains in global financial markets. Regarding inflation, the recent run-up in consumer energy prices was expected to subside over the next few months, while the effects of the drought were likely to show through to retail food prices. Over the medium term, most participants anticipated that inflation would run at or below the Committee’s 2 percent objective.
Concerning developments in the household sector, participants observed that the recent news on consumer spending and confidence had been positive, with surveys reporting that households had become noticeably more optimistic about the outlook for unemployment and income. Sales of motor vehicles remained an area of strength, in part due to favorable credit conditions. The increase in consumer spending appeared to be relatively broadly based across the country, although retailers in a few areas reported that they had seen slower sales recently and expressed concerns about the near-term outlook. Among the factors mentioned that might support consumer confidence and a continuation of the somewhat stronger pace of spending were an expected decline in retail energy prices and continued gradual improvement in labor market conditions. In addition, lower mortgage rates had spurred a rise in refinancing activity, which, along with the increases in household wealth attributable to higher home values and equity prices, would provide support for consumer spending going forward.
Participants generally agreed that a recovery in housing activity now appeared to be under way, citing increases in house prices, sales, and construction in many areas. Most saw the low levels of mortgage interest rates as an important factor contributing to increased housing demand. Although the recovery in the housing sector appeared to be taking hold, several participants cited obstacles to more rapid improvement. For example, several participants reported that lenders’ capacity for processing home-purchase mortgages was tight and backlogs were long, in part due to the current heavy pace of refinancings. These participants also noted that underwriting standards remained quite tight, particularly for borrowers with lower credit quality.
In contrast to the more favorable news on consumer spending and housing, contacts generally reported slower activity in the business sector. Some participants expressed concern about weaker manufacturing output and new orders in recent months, particularly in capital goods industries, although several pointed out that manufacturers’ expectations for future orders and production were more positive. A few participants noted that shipping activity was down, and one participant added that energy production had decelerated. In contrast, a few participants had received reports of a pickup in nonresidential construction, and one indicated that high-tech firms were expecting gains in business going forward. In many instances, participants’ business contacts stated that they were delaying or cutting back on hiring and capital spending because of the uncertain outlook for government spending, taxes, or regulatory policies. One participant, however, reported that contacts said that insufficient demand remained their principal concern. Several participants mentioned that the cautious posture of businesses was apparent in national and regional surveys of plans of both large and small firms. Some participants noted that the outlook for business spending would likely be difficult to assess until the direction of U.S. fiscal policy becomes clearer. A few suggested the possibility that a near-term resolution of the fiscal situation might lead to a significant increase in spending as projects now being deferred were undertaken; another worried that the uncertainty attending the outlook for fiscal policy might weigh on business planning for some time. In addition to the uncertainty about the fiscal outlook, manufacturing contacts attributed the weakness in orders and production to softer export demand; one participant added that agricultural exports had also softened. Several participants noted that their contacts were concerned not only about the economic slowdown in Europe, but also about whether the recent slowing in economic activity in Asia might persist.
In their comments on labor market developments, participants generally viewed the recent decline in the unemployment rate and continued modest gains in payroll employment, taken together, as consistent with a gradually improving job market. However, with economic growth anticipated to stay moderate, some participants expressed concern that the pace of job creation would generate only a slow decline in joblessness. Several pointed to a steep drop in the index of hiring plans by small businesses. A couple of participants mentioned that some firms planned to increase their use of part-time or temporary workers rather than full-time permanent employees, at least partly in order to limit health insurance costs.
Participants saw recent price developments as consistent with inflation remaining at or below the Committee’s 2 percent objective over the medium run. Although energy prices had risen sharply in recent months, reflecting earlier increases in crude oil costs and supply disruptions, gasoline prices were anticipated to move back down in coming months as those pressures eased. Similarly, effects of the drought were expected to show through to retail food prices over the next few quarters but then subside. By various estimates, underlying inflation trends remained subdued, and indicators of longer-term inflation expectations were generally viewed as stable.
In their discussion of financial developments over the intermeeting period, participants commented on the effects of the policy actions taken at the September meeting to strengthen the Committee’s forward guidance and to purchase additional MBS. The initial effects were generally viewed as consistent with a marked easing in financial conditions. For example, yields on MBS dropped noticeably, leading to a decline in mortgage interest rates, and corporate bond yields generally moved lower. Yields on nominal Treasury securities were little changed. Some participants suggested that more time would be required to assess the ultimate effects of the additional MBS purchases on primary mortgage rates and on financial conditions more broadly. The stability in nominal Treasury yields, paired with a decline in TIPS yields, implied a modest increase in inflation compensation, on net, over the intermeeting period. A couple of participants saw this increase as a sign that the open-ended asset purchases posed a risk to the stability of longer-term inflation expectations. However, others saw the effect on expected inflation as relatively muted or likely the result of reduced risks of undesirably low inflation. Participants remained concerned about risks to financial markets associated with the situation in the euro area and uncertain U.S. fiscal prospects, but a couple noted that measures of financial market uncertainty were still relatively low. Several participants pointed out that recent policy announcements by the European Central Bank were received favorably in markets. A number of participants mentioned other signs of greater optimism in financial markets, including a rise in merger and acquisition activity and a moderation in pressures on large U.S. financial institutions. A few participants observed that low interest rates had increased demand for riskier financial products, and a couple of participants saw a risk that holding interest rates low for a prolonged period could lead to financial imbalances and imprudent risk-taking. One participant, however, commented that risk aversion still seemed quite high, citing the very low yields on longer-term TIPS and a large estimated risk premium in equity markets.
Participants also discussed the efficacy and potential costs of the Committee’s asset purchases. A number of participants offered the assessment that the Committee’s policy actions, to date, had been effective in making financial conditions more accommodative and that lower interest rates were providing support to aggregate spending, most notably in areas such as housing, autos, and other consumer durables. In particular, some pointed out that the favorable developments in mortgage markets over the intermeeting period suggested that the MBS purchases were likely to reinforce the nascent recovery in the housing market. Several added that, based on the experience with earlier asset purchases, the broader effects on economic activity from more-accommodative financial conditions were likely to accrue over time. Looking ahead, a number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity extension program in order to achieve a substantial improvement in the labor market. In that regard, a couple of participants noted the likely usefulness of clarifying the range of indicators that would be evaluated in assessing the outlook for the labor market. Participants generally agreed that in determining the appropriate size, pace, and composition of further purchases, they would need to carefully assess the efficacy of asset purchases in fostering stronger economic activity and consider the potential risks and costs of such purchases. Several participants questioned the effectiveness of the current purchases or whether a continuation of them would be warranted if the recent moderate pace of economic recovery were sustained. In addition, several participants expressed concerns that sizable asset purchases might eventually have adverse consequences for the functioning of asset markets or that they might complicate the Committee’s ability to remove policy accommodation at the appropriate time and normalize the size and composition of the Federal Reserve’s balance sheet. A couple of participants noted that an extended period of policy accommodation posed an upside risk to inflation.
Committee Policy Action
Members viewed the information on U.S. economic activity received over the intermeeting period as suggesting that the economy was, on balance, expanding moderately, with a pickup in household spending and further improvement in housing markets offset to some extent by a slowdown in the business sector. Although the unemployment rate declined in recent months, monthly gains in nonfarm payroll jobs remained modest, and many members noted that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in the labor market. Inflation rose recently because of a temporary run-up in energy prices. However, longer-term inflation expectations were stable, and over the medium run, inflation was anticipated to run at or below the Committee’s 2 percent objective.
In their discussion of monetary policy for the period ahead, Committee members generally agreed that their overall assessments of the economic outlook were little changed since their previous meeting. Accordingly, all but one member judged that maintaining the current, highly accommodative stance of monetary policy was warranted in order to foster a stronger economic recovery in a context of price stability. The Committee judged that continuing both the purchases of MBS at a pace of $40 billion per month and the existing program to extend the average maturity of its Treasury securities holdings remained appropriate. The Committee also agreed to maintain its policy of reinvesting principal payments from its holdings of agency debt and agency MBS into agency MBS. One member opposed further asset purchases because he viewed them as unlikely to help the Committee achieve its goals and because he thought that purchases of MBS represented inappropriate credit allocation. Many members saw the adjustments in the Committee’s forward guidance at the September meeting as having been effective in communicating its intention to maintain a highly accommodative stance of monetary policy for a considerable time after the economic recovery strengthens and judged that the guidance remained appropriate at this meeting. However, one member continued to object to the calendar-date-based forward guidance for the federal funds rate. With respect to the statement to be released following the meeting, members made only relatively small modifications to update the description of recent developments in consumer and business spending and in inflation. With the economic outlook little changed, they agreed that the remainder of the statement would reiterate the policy actions and intentions adopted at the September meeting.
Source: Federal Reserve