FOMC Minutes: "Appropriate To Provide Additional Monetary Policy Accommodation"
Here is the key section with highlights on the November 3 QE2 announement:
Participants discussed the medium-term outlook for monetary policy and
issues related to monetary policy implementation. Many participants
noted that if economic growth remained too slow to make satisfactory
progress toward reducing the unemployment rate or if inflation continued
to come in below levels consistent with the FOMC's dual mandate, it
would be appropriate to provide additional monetary policy
accommodation. However, others thought that additional accommodation
would be warranted only if the outlook worsened and the odds of
deflation increased materially. Meeting participants discussed several
possible approaches to providing additional accommodation but focused
primarily on further purchases of longer-term Treasury securities and on
possible steps to affect inflation expectations. Participants reviewed
the likely benefits and costs associated with a program of purchasing
additional longer-term assets--with some noting that the economic
benefits could be small in current circumstances--as well as the best
means to calibrate and implement such purchases. A number of
participants commented on the important role of inflation expectations
for monetary policy: With short-term nominal interest rates constrained
by the zero bound, a decline in short-term inflation expectations
increases short-term real interest rates (that is, the difference
between nominal interest rates and expected inflation), thereby damping
aggregate demand. Conversely, in such circumstances, an increase in
inflation expectations lowers short-term real interest rates,
stimulating the economy. Participants noted a number of possible
strategies for affecting short-term inflation expectations, including
providing more detailed information about the rates of inflation the
Committee considered consistent with its dual mandate, targeting a path
for the price level rather than the rate of inflation, and targeting a
path for the level of nominal GDP. As a general matter, participants
felt that any needed policy accommodation would be most effective if
enacted within a framework that was clearly communicated to the public.
The minutes of FOMC meetings were seen as an important channel for
communicating participants' views about monetary policy.
With respect to the statement to be released following the meeting,
members agreed that it was appropriate to adjust the statement to make
it clear that underlying inflation had been running below levels that
the Committee judged to be consistent with its mandate for maximum
employment and price stability, in part to help anchor inflation
expectations. Nearly all members agreed that the statement should
reiterate the expectation that economic conditions were likely to
warrant exceptionally low levels of the federal funds rate for an
extended period. One member, however, believed that continuing to
communicate that expectation in the Committee's statement would create
conditions that could lead to macroeconomic and financial imbalances.
Members generally thought that the statement should note that the
Committee was prepared to provide additional accommodation if needed to
support the economic recovery and to return inflation, over time, to
levels consistent with its mandate. Such an indication accorded with the
members' sense that such accommodation may be appropriate before long,
but also made clear that any decisions would depend upon future
information about the economic situation and outlook.
On the previously leaked GDP number:
In the economic forecast prepared for the September FOMC meeting, the
staff lowered its projection for the increase in real economic activity
over the second half of 2010. The staff also reduced slightly its
forecast of growth next year but continued to anticipate a moderate
strengthening of the expansion in 2011 as well as a further pickup in
economic growth in 2012. The softer tone of incoming economic data
suggested that the underlying level of demand was weaker than projected
at the time of the August meeting. Moreover, the outlook for foreign
economic activity also appeared a bit weaker. In the medium term, the
recovery in economic activity was expected to receive support from
accommodative monetary policy, further improvements in financial
conditions, and greater household and business confidence. Over the
forecast period, the increase in real GDP was projected to be sufficient
to slowly reduce economic slack, although resource slack was
anticipated to still remain elevated at the end of 2012.
The lone crusader against insanity continues to be Hoenig:
Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Sandra Pianalto, Eric Rosengren, Daniel K. Tarullo, and Kevin Warsh.
Voting against this action: Thomas M. Hoenig.
Mr. Hoenig dissented, emphasizing that the economy was entering the second year of moderate recovery and that, while the zero interest rate policy and "extended period" language were appropriate during the crisis and its immediate aftermath, they were no longer appropriate with the recovery under way. Mr. Hoenig also emphasized that, in his view, the current high levels of unemployment were not caused by high interest rates but by an extended period of exceptionally low rates earlier in the decade that contributed to the housing bubble and subsequent collapse and recession. He believed that holding rates artificially low would invite the development of new imbalances and undermine long-run growth. He would prefer removing the "extended period" language and thereafter moving the federal funds rate upward, consistent with his views at past meetings that it approach 1 percent, before pausing to determine what further policy actions were needed. Also, given current economic and financial conditions, Mr. Hoenig did not believe that continuing to reinvest principal payments from SOMA securities holdings was required to support the Committee's policy objectives.
All in all, just as expected