March FOMC Minutes: No Need To Taper QE2, GDP Outlook Revised Lower

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Key Highlights:

  • GDP revised modestly lower from January meeting on surging commodity prices
  • FOMC sees stronger recovery, higher inflation
  • Fed officials divided over tighter policy
  • Almost all Fed officials saw no need to taper QE2 buying

On inflation: "Sizable increases in prices of crude oil and other commodities pushed up headline inflation, but measures of  underlying inflation were subdued and longer-run inflation expectations remained stable."

"The staff revised up its projection for consumer price inflation in the near term, largely because of the recent increases in the prices of energy and food. However, in light of the projected persistence of slack in labor and product markets and the anticipated stability in longterm inflation expectations, the increase in inflation was expected to be mostly transitory if oil and other commodity prices did not rise significantly further. As a result, the forecast for consumer price inflation over the medium run was little changed relative to that prepared for the January meeting."

On ECB hiking: "The European Central Bank (ECB) left its benchmark policy rate unchanged at its March meeting, but the emphasis on upside risks to inflation at the postmeeting press conference led market participants to infer that the ECB might well tighten policy at its meeting in April."

On UK hiking: "In the United Kingdom, market-based readings on expected policy rates indicated that investors anticipated some tightening of policy before the end of this year."

On Brian Sack's QE2 Progress Update: "Since November, purchases by the Open Market Desk of the Federal Reserve Bank of New York had increased the SOMA’s holdings by $310 billion. The Manager reported that achieving an increase of $600 billion in SOMA holdings by the end of June 2011 would require continuing to purchase additional securities at an unchanged pace of about $80 billion per month. There were no open market operations in foreign currencies for the System’s account over the intermeeting period. By unanimous vote, the Committee ratified the Desk’s transactions over the intermeeting period."

On labor: "The labor market continued to show signs of firming. Private nonfarm payroll employment rose noticeably in February after a small increase in January, with the swing in hiring likely magnified by widespread snowstorms, which may have held down the employment figure for January. Initial claims for unemployment insurance trended lower through early March,  and surveys of hiring plans had improved this year. The unemployment rate dropped markedly in January after a similar decrease in the preceding month, then ticked down to 8.9 percent in February; the labor force participation rate was roughly flat in January and February."

On the stock market as the economy:
"Broad U.S. stock price indexes were about unchanged, on net, over the intermeeting period. Option-implied volatility on the S&P 500 index rose sharply in mid-February in response to events in the MENA region and remained somewhat elevated thereafter.."

On increasing dealer leverage: "In response to special questions, dealers reported some increase in the use of leverage over the prior six months by traditionally unlevered investors—in particular, asset managers, insurance companies, and pension funds. More broadly, while the availability and use of dealer-intermediated leverage had increased since its post-crisis nadir in mid-2009, a review of information from a variety of sources suggested that leverage generally remained well below the levels reached prior to the recent financial crisis."

On the economic outlook: "The pace of economic activity appeared to have been a little slower around the turn of the year than the staff had anticipated at the time of the January FOMC meeting, and the near-term forecast for growth of real gross domestic product (GDP) was revised down modestly. However, the outlook for economic activity over the medium term was broadly similar to the projection prepared for the January FOMC meeting. Crude oil prices had risen sharply and federal fiscal policy seemed likely to be marginally more restrictive than the staff had judged in January, but these negative factors were counterbalanced by higher household net worth and a slightly lower foreign exchange value of the dollar. As a result, as in the January forecast, real GDP was expected to rise at a moderate pace over 2011 and 2012, supported by accommodative monetary policy, increasing credit availability, and greater household and business confidence."

On the yield curve:
"Measures of inflation compensation over the next 5 years rose, on net,
over the intermeeting period, with most of the increase concentrated at
the front end of the curve, likely reflecting the jump in oil prices. In
contrast, measures of forward inflation compensation 5 to 10 years
ahead were little changed, suggesting that longer-term inflation expectations remained stable."

No need to taper QE2: "As its earlier program of agency MBS purchases drew to a close, the Federal Reserve tapered its purchases during the first quarter of 2010 in order to avoid disruptions in the market for those securities. However, the Manager indicated that the greater depth and liquidity of the Treasury securities market suggested that it would not be necessary to taper purchases in this market. not be necessary to taper purchases in this market. The Manager noted that market participants appeared to have reached the same conclusion, as they generally did not seem to expect the Federal  Reserve to taper its purchases of Treasury securities. In light of the Manager’s report, almost all meeting participants indicated that they saw no need to taper the pace of the Committee’s purchases of Treasury securities when its current program of asset purchases approaches its end."

Full Minutes: