Minutes of the July 31-Aug. 1 Federal Open Market Committee meeting
reveal Fed policymakers were inclined to provide more monetary stimulus,
but that does not necessarily indicate where sentiment lies three weeks
later in wake of firmer economic data and a sizable stock market rally.
Confirming what MNI had surmised, the minutes show the FOMC was not
ready to do more so soon after extending “Operation Twist” June 20. “The
committee had provided additional accommodation at its previous meeting
by announcing the continuation of the maturity extension program through
the end of the year, and more time was seen as necessary to evaluate the
effects of that decision.”
But, as the Aug. 1 statement implied, the easing bias intensified.
Given high unemployment and subdued inflation, the minutes say “a number
of them indicated that additional accommodation could help foster a more
rapid improvement in labor market conditions in an environment in which
price pressures were likely to be subdued.” And “many members judged
that additional monetary accommodation would likely be warranted fairly
soon unless incoming information pointed to a sub-stantial and
sustainable strengthening in the pace of the economic recovery.”
In a discussion of easing tools, a third round of quantitative
easing got most of the focus, together with revamped “forward guidance”
on the federal funds rate path. The minutes say “many participants
expected that such a (QE3) program could provide additional support for
the economic recovery both by putting downward pressure on longer-term
interest rates and by contributing to easier financial conditions more
broadly. In addition, some participants noted that a new program might
boost business and consumer confidence and reinforce the Committee’s
commitment to making sustained progress toward its mandated objectives.”
As for prolonging the expected date of rate hikes past “late 2014,”
the minutes say, “It was noted that such an extension might be
particularly effective if done in conjunction with a statement
indicating that a highly accommodative stance of monetary policy was
likely to be maintained even as the recovery progressed.” MNI reported
recently there is little support for cutting the interest rate on excess
reserves or launching a Bank of England-style subsidized lending
program, and the minutes confirm that only “a couple” participants favor
those tools. But the Fed is known to still be looking at how it can more
effectively use its discount window to spur more bank lending.
When the FOMC met, as it said at the time, economic activity had
“decelerated.” Since then, while it is not setting the world on fire,
the economy has improved. And this is causing some second thoughts about
additional easing. Atlanta Fed President Dennis Lockhart, an FOMC voter
and a barometer of mainstream sentiment among Fed officials, had sounded
more open to supporting QE3 in a July 13 speech, saying he had been
watching the economy “with increasing concern” and that his “receptivity
(to QE3) has increased a bit.” But he used a different tone on Aug. 21.
He warned “there is a risk to monetary policy being employed too
aggressively and without effect to address economic problems that can be
resolved only by fiscal reforms …” And when MNI asked him if he had
become more reticent about QE3, he replied, “The data just recenlty have
been a little firmer, and I think that certaianly can infleunce how
ready a policymaker might be to make a move at a particular potint of
time.” He also called the Wall Street rally “encouraging” and indicative
of “more appetite for risk.”
To be sure, there are those who still favor more easing. But others
adamantly oppose it. Dallas Fed President Richard Fisher, in an MNI
interview last week, said he would only back additional easing “if we
had a massive implosion.” Short of that he would oppose it. “I just
worry that the benefit, for maybe 20 or 30 basis points, just really
isn’t worth it, given that people aren’t putting the money we’ve made
available to work and the velocity is flat. Is it really worth taking
this risk for 20 basis points or 30 basis points … when in fact
already corporate credit and the interest rate on U.S. Treasuries is the
lowest in history?” Among the costs, holding rates down would “do
nothing to encourage Congress to get their (fiscal) act together.”
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