Goldman's Take On FOMC Minutes And "Price Level Targetting"
From Jan Hatzius:
"BOTTOM LINE: Minutes of Sep 21 meeting confirm that FOMC was dissatisfied with the performance of the US economy even though most did not expect either renewed recession or deflation. The committee considered a range of options, focusing on Treasury purchases but including the possibility of adopting target paths for either prices or nominal GDP. Most participants appear to have thought that the status quo would justify renewed easing relatively soon, but a few thought more weakening would be required."
Spot on Jan - now please ask the Spear Leeds boys if they can please invert every single input function in REDI, so that Buy is Sell, and people can at least pretend they are Selling on bad news, and vice versa...
More from Goldman:
1. The backdrop of these minutes was clearly one of disappointment regarding recent economic activity and inflation, both of which were judged to be unacceptably low relative to the committee's mandates. The staff lowered its growth forecast for the remainder of 2010 and slightly for 2011 as well. While its view anticipated a small absorption of spare capacity by 2012, this was not judged to be enough to prevent a net decline in core inflation between 2010 and 2012.
2. Although the statement released at the conclusion of this meeting highlighted the fact that inflation was lower than most members saw as consistent with the FOMC's mandate, there is no suggestion in these minutes that this position was taken for any reason other than the fact that inflation remains subdued. In particular, while we have surmised that this may have been a back-door way of strengthening the commitment to keep the federal funds rate "exceptionally low" and continue to believe that it has that effect, nothing in the minutes overtly supports the hypothesis that this was a significant motivation.
3. In considering the range of options it might have in responding to ongoing weakness, the committee's main focus was on purchases of longer-term Treasury securities and efforts to influence inflation expectations. However, at least some participants also suggested that the committee could consider targeting the path of the price level or targeting nominal GDP. However, no further details were provided to options that probably are favored by only a few members, albeit potentially key ones, at this time.
4. In the section discussing the decisions taken with respect to the statement, the language hints-but does not specifically say-that some members would have been ready to adopt quantitative easing at the September meeting. Specifically, "…some members saw merit in accumulating further information before reaching a decision about providing additional stimulus." To us, the first part of this reads as if the alternative was to act immediately. Also, "in addition, members wanted to consider further the most effective framework for calibrating and communicating any additional steps to provide such stimulus." In short, the conditions were in place to act, but some time was needed to figure out how much stimulus to apply.
5. Toward this latter point, the minutes suggest that "many" participants thought that continuation of the status quo was sufficient to justify more easing in policy, while "others" thought more weakness would be required. To our ear, "many" is more than "others," particularly when they are mentioned first.