–‘A Few’ See Appropriate Mon Policy In 2012 To Include Asset Purchases
–Reiterates Would Likely Cease Reinvestments Before Any Rate Hike
By Brai Odion-Esene
WASHINGTON (MNI) – A number of participants on the Fed’s
policymaking Federal Open Market Committee are willing to contemplate
more purchases of long-term securities should the U.S. economy sail into
rougher seas, the minutes from the body’s January meeting showed
Wednesday.
In an effort at expanded transparency, the minutes included
“qualitative information” regarding participants’ views on the
appropriate path of the Federal Reserve’s balance sheet.
“A few participants’ assessments of appropriate monetary policy
incorporated additional purchases of longer-term securities in 2012, and
a number of participants indicated that they remained open to a
consideration of additional asset purchases if the economic outlook
deteriorated,” it said.
The minutes also reiterated the FOMC’s likely strategy when the
time comes to tighten monetary conditions and normalize its balance
sheet, principles that were approved at its June meeting last year.
“Prior to the first increase in the federal funds rate, the
Committee would likely cease reinvesting some or all payments on the
securities holdings in the System Open Market Account (SOMA),” the
minutes said.
The sales would likely begin “sometime after” the first rate hike,
the minutes added, with the goal of eliminating the Fed’s holdings of
agency securities over a period of three to five years.
While most FOMC participants do not see sales beginning any earlier
than 2015, the minutes said those members that anticipate an earlier
increase in the federal funds rate also called for earlier adjustments
to the balance sheet, and one assumed an early end of the maturity
extension program.
The release of the minutes was accompanied by the full release of
participants’ economic projections, forecasts that the minutes said were
“subject to a higher level of uncertainty that was the norm during the
previous 20 years.”
“A majority of participants continued to report that they saw the
risks to their forecasts of real GDP growth as weighted to the downside
and, accordingly, the risks to their projections for the unemployment
rate as skewed to the upside,” it said.
“All but one of the remaining participants viewed the risks to both
projections as broadly balanced, while one noted a risk that the
unemployment rate might continue to decline more rapidly than expected,”
the minutes added.
It noted that FOMC participants continued to be uncertain about the
pace at which credit conditions would ease and about prospects for a
recovery in the housing sector. In addition, participants generally saw
the outlook for fiscal and regulatory policies as still highly
uncertain.
Not surprisingly, the most frequently cited downside risks to the
projected pace of growth were the possibility of financial market and
economic spillovers from crisis in Europe, “and the chance that some of
the factors that have restrained the recovery in recent years could
persist and weigh on economic activity to a greater extent than assumed
in participants’ baseline forecasts.”
FOMC participants “anticipated that continued policy efforts would
be necessary in Europe to fully address the area’s fiscal and financial
problems,” the minutes said.
Also, a number of participants noted the risk of another disruption
in global oil markets that could not only boost inflation but also
reduce real income and spending.
Those that saw risks as broadly balanced argued the downside risks
would be counterbalanced by the possibility that resurgent economic
activity from Q4 2011 would prove resilient, “and the recent drop in the
unemployment rate might signal greater underlying momentum in economic
activity.”
In contrast to their outlook for economic activity, the minutes
said most participants judged the risks to their projections of
inflation as “broadly balanced,”
“While many of these participants saw the persistence of
substantial slack in resource utilization as likely to keep inflation
subdued over the projection period, a few others noted the risk that
elevated resource slack might put more downward pressure on inflation
than expected,” the minutes said.
Along with the usual statement following the January meeting, the
FOMC also extended the minimum length of time that it believes
short-term rates will need to remain at low levels — late-2014 — and
published each participants projections for the future path of the
federal funds rate.
The minutes said, however, that several members proposed either
“dropping or greatly simplifying” the forward guidance in the
Committee’s statement, arguing that information about each central
banker’s assessment of the appropriate future level of the federal funds
rate “made it unnecessary to include forward guidance in the
post-meeting statement.”
In a counter argument, “several other participants emphasized that
the information regarding the federal funds rate in the SEP could not
substitute for a formal decision of the members of the FOMC,” the
minutes said.
The minutes concluded with a cautionary note warning the outlook
for the future path of the federal funds rate is subject to considerable
uncertainty.
“If economic conditions evolve in an unexpected manner, then
assessments of the appropriate setting of the federal funds rate would
change from that point forward,” it said.
** Market News International Washington Bureau: 202-371-2121 **
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