–Significant Downside Risks Seen While Members Reviewed Strategy

By Denny Gulino

WASHINGTON (MNI) – The lack of change in monetary policy in the
Nov. 1-2 Federal Open Market Committee meeting masked an exceptional
amount of ferment among the members, with more than one member ready for
increased accommodation once a new communications strategy is worked
out, the minutes of the meeting published Tuesday showed.

The statement issued after the FOMC meeting, that detailed a
steady-as-you-go performance, had given no hint that “a few members
indicated that they believed the economic outlook might warrant
additional policy accommodation,” as detailed in the FOMC minutes.

They didn’t act because the FOMC had not finished its study of how
to change the way it describes its intent. As the minutes described it,
“It was noted that any such accommodation would likely be more effective
if it were provided in the context of a future communications
initiative.”

So meanwhile, these members — not identified but surely including
Charles Evans who dissented in favor of doing more — “agreed that they
could support retention of the current policy stance at this meeting.”

There was another block of potential dissenters, however, those
presumably not in favor of more accommodation, who also held back their
dissents — for the same reason. As the minutes said, “with the FOMC
reviewing both its strategies and communication, “a few members
indicated that they could support the Committee’s decision even though
they had not favored recent policy actions.”

Pending any changes in policy or communication, all the members
“agreed that only relatively small changes were needed” and those
because the economy had modestly improved since the previous statement.

Nevertheless members during the latest meeting were attuned to
change from the start, it appeared, hearing a staff presentation on
alternative monetary policy strategies. “Meeting participants discussed
those alternatives as well as potential approaches for enhancing the
clarity of their public communications,” the minutes said.

The usually dry minutes hinted at a lively discussion, as when
saying, “Many participants pointed to the merits of specifying an
explicit longer-run inflation goal.”

But it was also noted that an explicit longer-run inflation goal
“could be misperceived as placing greater weight on price stability than
on maximum employment.”

A majority of the FOMC members did agree it is time for a statement
“that would elucidate the Committee’s policy approach.”

Members “generally expressed interest in providing additional
information to the public about the likely future path of the target
federal funds rate.”

In fact, all aspects of the FOMC’s language seemed to be in play,
with members sharing their views “regarding the potential merits and
pitfalls of making conditional commitments regarding the future course
of monetary policy,” such as the now institutionalized language about
“exceptionally low levels for the federal funds rate at least through
mid-2013.”

Studies have shown such “conditional commitments” can help monetary
policy outcomes, the minutes noted, but have potential pitfalls as well,
particularly if the strategy “were not fully credible.”

At that point the minutes switched the way blocs within the
committee were described, masking the degree of support and opposition.
So, “In this vein, a number of participants expressed support for the
possibility of clarifying the conditionality of the Committee’s forward
guidance about the trajectory of the federal funds rate through setting
numerical thresholds for unemployment and inflation that would warrant
exceptionally low levels for the policy rate.”

Since the meeting, objections by members to such numerical trigger
statement proposals — attributed mainly to Evans — have been expressed
in no uncertain terms.

But within the FOMC meeting the minutes kept it less than clear
just how much support the proposal had. “Several participants noted that
such thresholds could be confusing in the absence of a clear expression
of the Committee’s longer-term goals.” Using such vague terms as “a
number” or “several,” the outside observer can only speculate about the
members’ cumulative leanings.

And so the meeting went, with everything on the table for
discussion but the approximate weight of opinion of factions within the
Committee as a whole left mostly unspecified.

The use of the nominal GDP or the price level as policy triggers
was also discussed, with some support and some opposition. The staff
liked the idea of nominal GDP targeting, presenting “model simulations”
that showcased the benefits. The staff didn’t like price-level
targeting, supporting their arguments with more simulations.

There were those who warned against signaling any asymmetry in
support for either one or the other of the dual mandates. And there was
some concern, again by a “number” of participants, about changing
anything. “Switching to a new policy framework could heighten
uncertainty about future monetary policy, risk unmooring longer-term
inflation expectations, or fail to address risks to financial
stability,” was their view.

They seemed to win out in the end, at least for now. “In light of
the significant challenges associated with the adoption of such
frameworks, participants agreed that it would not be advisable to make
such a change under present circumstances,” the minutes said.

While the minutes described several discussional cul-de-sacs, with
no resolution on long-term inflation targets, or triggers of various
sorts, or of even any basic changes “under present circumstances,” they
also signaled an exceptionally broad range of considerations now on the
FOMC’s radar. With the FOMC members embarked on such theoretical
exercises in early November, the ferment raised the prospect of changes
at some level, perhaps sooner rather than later.

Meanwhile, “participants still saw significant downside risks to
the outlook for economy growth,” risks that included European spillover,
larger-than-expected fiscal tightening, and the possibility monetary
policy is not working with the intensity intended because of structural
problems in the housing industry.

The FOMC members even discussed what was known at the time of the
problems at MF Global, concluding then that the ripple effects were not
large in the overall financial system.

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

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