WASHINGTON (MNI) – The following is the second and final part of an
excerpt from the text of the minutes of the Federal Open Market
Committee’s September 21 meeting published Tuesday. The section below is
Participants’ Views on Current Conditions and the Economic Outlook:

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.

Inflation had declined since the start of the recession, and most
participants indicated that underlying inflation was at levels somewhat
below those that they judged to be consistent with the Committee’s dual
mandate for maximum employment and price stability. Although prices of
some commodities and imported goods had risen recently, many business
contacts reported that they currently had little pricing power and that
they anticipated limited, if any, increases in labor costs. Meeting
participants noted that several measures of inflation expectations had
changed little, on net, over the intermeeting period and that analysis
of the components of price indexes suggested disinflation might be
abating. However, TIPS-based inflation compensation had declined, on
balance, in recent quarters. While underlying inflation remained
subdued, participants saw only small odds of deflation.

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 shortterm 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 mi- nutes of FOMC meetings were seen as an important channel for
communicating participants’ views about monetary policy.

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** Market News International Washington Bureau: 202-371-2121 **

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