September 2010 FOMC meeting minutes are a decent read

Most of the times minutes of the Federal Open Market Committee have a good round-up of US and global economy. It is quite detailed as well. Though, unlike minutes of Sweden Central Bank MPC the names of Fed members are not given unless he/she  has dissented from the consensus statement.  So, in Sweden you will get to read Lars Svensson’s views, Stefan Ingves’s views etc. In FOMC minutes, you don’t get these names except in case of dissent.

With the situation US is in, the minutes are providing an interesting reading. Especially the discussion on unemployment and policy options. I was reading the minutes of the meeting held on 21 Sep-10.

On unemployment members say there is no one reason for high unemployment. It is a multiple reasons:

A number of participants noted that the current sluggish pace of employment growth was insufficient to reduce unemployment at a satisfactory pace. Several participants reported feedback from business contacts who were delaying hiring until the economic and regulatory outlook became more certain. Participants discussed the possible extent to which the unemployment rate was being boosted by structural factors such as mismatches between the skills of the workers who had lost their jobs and the skills needed in the sectors of the economy with vacancies, the inability of the unemployed to relocate because their homes were worth less than their mortgages, and the effects of extended unemployment benefits.

Participants agreed that factors like these were pushing the unemployment rate up, but they differed in their assessments of the extent of such effects. Nevertheless, many participants saw evidence that the current unemployment rate was considerably above levels that could be explained by structural factors alone, pointing, for example, to declines in employment across a wide range of industries during the recession, job vacancy rates that were relatively low, and reports that weak demand for goods and services remained a key reason why firms were adding employees only slowly.

So, it is a bit of mismatch, bit of financial stress, bit of housing stress and a bit of overall collapse in demand.

On inflation, the members say it is lower than the preferred range but deflation odds are still small.

The discussion on policy options show the divide:

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.

So they discussed – inflation targeting, price level targeting, Quantitative easing (buying mostly US Treasuries not other kinds of assets, most seem to agree to this) and interestingly GDP targeting. That is an idea suggested many times by Scott Sumner.

On QE2, I would also like to mention this post by James Hamilton. He says markets have already discounted QE2 and rates are lower by around 50-60 bps since the expectations set in. So it will not really help.

Otherwise, markets seem to be cheering the latest minutes and thinking Qe2 is now a certainty. Equity prices seem to be rallying everywhere.

Watch out for Fed moves!

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2 Responses to “September 2010 FOMC meeting minutes are a decent read”

  1. September 2010 FOMC meeting minutes are a decent read | Apply Says:

    […] from: September 2010 FOMC meeting minutes are a decent read This entry was posted in Uncategorized and tagged committee, current, economy, monetary-policy, […]

  2. Communicating Fed policies ahead.. « Mostly Economics Says:

    […] minutes of meeting held on 3 Nov were released yesterday. Like previous meeting minutes this one also provides lots of economic and financial markets […]

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