Fed Chairman Ben Bernanke
Overall it was a dovish tone to the minutes. The policymakers debated the upside and downside risks to inflation, the nature of a volatile recovery, and the gradual improvements we have witnessed to date. They acknowledge the improvement in data, but continue to look for a slow recovery, questionable unemployment and subdued prices. The notion that the Fed should stand ready to extend its asset purchases beyond this quarter was a major point of discussion at the meeting, and the Fed will dynamically adapt policy to circumstances as warranted. The general consensus believes that the Fed in early 2010 is in a strong position to better telegraph their game plan now that the tools are in place.
‘Participants agreed it would be useful to consider further steps the Federal Reserve might take to move toward normalization of its lending facilities at upcoming meetings, when the Committee plans to discuss alternative approaches to implementing monetary policy in the longer-run.’
They attributed improvement in housing data partly to the extended period of low rates, but acknowledged that any premature rise in rates would not be welcomed.
‘The recent increases in housing sales likely reflected improved fundamentals. The average interest rate on 30-year conforming fixed-rate mortgages declined to less than 5%, and surveys suggested that households now expected home prices to be fairly stable over the next year.’
They continue to worry about lending conditions. The extended period of lower rates is not filtering down into the real economy.
‘Commercial and industrial loans continued to drop, likely reflecting weak demand and a continued tightening of credit terms by banks’.
The unemployment projections over the next two years retreat slowly.
‘The projected pace of real output growth in 2010 and 2011 was expected to exceed that of potential output by only enough to produce a very gradual reduction in economic slack’. ‘The unusually large fraction of those individuals with jobs who were working part time for economic reasons, as well as the uncommonly low level of the average workweek, pointed to only a gradual decline in unemployment as the economic recovery proceeded’.
Again they see inflation falling over the next 2-years and below their desired target.
‘The staff continued to project that core inflation would slow somewhat from its current pace over the next two years’.
However, currently headline inflation does not remain a concern.
‘The staff interpreted the increases in prices of energy and nonmarket services that recently boosted consumer price inflation as largely transitory’.
Like most analysts, the Fed remains apprehensive about housing in the coming months. A strong enough reason justifying the Fed’s stance on keeping rates low for an extended period.
‘Some participants remained concerned about the economy’s ability to generate a self-sustaining recovery without government support. In particular, they noted the risk that improvements in the housing sector might be undercut next year as the Federal Reserve’s purchases of MBS wind down, the homebuyer tax credits expire, and foreclosures and distress sales continue’.
FOMC Minutes
