–Participants Generally Saw Limitations Of Post-FOMC Statement
–Would Need To Use Other Means To Communicate FOMC Thinking Re Mon Pol
–If EU Policymakers Don’t Respond Effectively Problems Could Intensify

By Brai Odion-Esene

WASHINGTON (MNI) – The minutes of the recent meeting of the Fed’s
policymaking body released Wednesday do not show a sharp debate over the
appropriate monetary policy response to the stagnant U.S. economic
recovery despite three dissents, but it does reflect Fed officials want
to improve the means by which they communicate their thinking to the
markets and the wider public.

“Participants generally saw the Committee’s post-meeting statements
as not well suited to communicate fully the Committee’s thinking about
its objectives and its policy framework, and agreed that the Committee
would need to use other means to communicate that information or to
supplement information in the statement,” the minutes from the Sept.
20-21 meeting of the Federal Open Market Committee said.

The minutes noted that most participants indicated they favored
taking steps to further increase the transparency of monetary policy,
including providing more information about the Committee’s longer-run
policy objectives and about the factors that influence the Committee’s
policy decisions.

An increased desire on the part of the Fed to enhance understanding
of its policies is not surprising given the number of attacks it has
faced from lawmakers, GOP presidential nominees and the American public
in general.

“Participants generally agreed that a clear statement of the
Committee’s longer-run policy objectives could be helpful,” the minutes
said, adding that “some noted that it would also be useful to clarify
the linkage between these longer-run objectives and the Committee’s
approach to setting the stance of monetary policy in the short and
medium run.”

Some Fed officials have argued in favor of linking policy actions
to an explicit inflation and employment rate target, and the minutes
said many on the FOMC believed that, should it agree on more explicit
statements of its long-run objectives, “it would need to provide an
in-depth explanation to the public of how those objectives were
determined and how they fit into the policymaking framework.”

The September meeting took place at a time when the U.S. economic
recovery appeared to have stalled, and the unemployment rate remained
stubbornly high. The minutes said the FOMC contemplated several tools
that could be used to provide additional monetary policy accommodation
to support the recovery.

“In the discussion of monetary policy for the period ahead, most
members agreed that the revisions to the economic outlook warranted some
additional monetary policy accommodation to support a stronger recovery
and to help ensure that inflation, over time, was at a level consistent
with the Committee’s dual mandate,” the minutes said.

These tools included expanding the Fed’s balance sheet, the
aforementioned explicit unemployment target, or lowering the interest
paid on excess reserves (IOER).

The minutes said while many felt these policies could provide
additional accommodation by lowering longer-term interest rates and
easing financial conditions — at a time when further rate cuts are not
feasible — “a number saw the potential effects on real economic
activity as limited or only transitory.”

On the other hand, a number of officials at the meeting saw
large-scale asset purchases — or QE3 — as potentially a more potent
tool “that should be retained as an option in the event that further
policy action to support a stronger economic recovery was warranted.”

The FOMC eventually settled on the $400 billion ‘Operation Twist’
program that would buy long-term government debt while selling an equal
amount of shorter-date securities by June 2012, as well as reinvesting
principal payments from its agency debt and agency mortgage-backed
security holdings back into agency MBS.

“While they recognized that monetary policy alone could not
completely address the economy’s ills, most members judged that
additional accommodation could contribute importantly to better outcomes
in terms of the Committee’s dual mandate of maximum employment and price
stability,” it added.

Although much has been made of the three FOMC voters that have now
dissented at the last two meetings — the Dallas Fed’s Richard Fisher,
the Minneapolis Fed’s Narayana Kocherlakota and the Philadelphia Fed’s
Charles Plosser — the minutes show some members wanted the FOMC to go
even further.

Two members said current conditions and the outlook could justify
stronger policy action, the minutes said, but they eventually supported
the FOMC’s action “as it did not rule out additional steps at future
meetings.”

On the yet-to-be resolved European debt crisis, the minutes said
Fed officials agreed that, if European policymakers did not respond
effectively, “European sovereign debt and banking problems could
intensify, with potentially serious spillovers to the U.S. economy.”

They went on to noted, however, that the European Central Bank was
providing ample liquidity to European banks, and that it had substantial
capacity to provide additional liquidity through its lending facilities
if necessary.

Prior to the FOMC’s September decision, many in the market had
believed that it would couple its Operation Twist announcement with a
cut in the IOER. According to the minutes, however, many participants
voiced concerns that reducing the rate risked costly disruptions to
money markets and to the intermediation of credit, and that the
magnitude of such effects would be difficult to predict in advance.

“In addition, the federal funds market could contract as a result
and the effective federal funds rate could become less reliably linked
to other short-term interest rates,” it said.

As a result, “Participants generally agreed that they needed more
information on the likely effects of a reduction in the IOR rate in
order to judge its usefulness as a policy tool in the current
environment,” the minutes said.

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

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