There were other significant parts of the minutes.
Although the March 16 rate announcement was a tad more upbeat with
regard to jobs and business investment, it also retained gloomy
elements, and the minutes do likewise in describing FOMC participants’
views.
“(P)articipants agreed that economic activity continued to
strengthen and that the labor market appeared to be stabilizing,” say
the minutes, adding that recent data “generally confirmed that the
economic recovery was likely to proceed at a moderate pace….”
“However,” it goes on to add a number of offsetting caveats:
“housing starts had remained flat at a depressed level, investment in
nonresidential structures was still declining, and state and local
government expenditures were being depressed by lower revenues.”
“Moreover, consumer sentiment continued to be damped by very weak
labor market conditions, and firms remained reluctant to add to payrolls
or to commit to new capital projects,” the minutes add.
Perhaps most significantly, the minutes reflect very little concern
about inflation.
“Participants saw recent inflation readings as suggesting a
slightly greater deceleration in consumer prices than had been
expected,” they say. “In light of stable longer-term inflation
expectations and the likely continuation of substantial resource slack,
they generally anticipated that inflation would be subdued for some
time.”
Looking ahead, “while participants saw incoming information as
broadly consistent with continued strengthening of economic activity,
they also highlighted a variety of factors that would be likely to
restrain the overall pace of recovery, especially in light of the waning
effects of fiscal stimulus and inventory rebalancing over coming
quarters,” the minutes disclose.
“While recent data pointed to a noticeable pickup in the pace of
consumer spending during the first quarter, participants agreed that
household spending going forward was likely to remain constrained by
weak labor market conditions, lower housing wealth, tight credit, and
modest income growth,” they continue. “For example, real disposable
personal income in January was virtually unchanged from a year earlier
and would have been even lower in the absence of a substantial rise in
federal transfer payments to households.”
“Business spending on equipment and software picked up
substantially over recent months, but anecdotal information suggested
that this pickup was driven mainly by increased spending on maintaining
existing capital and updating technology rather than expanding
capacity,” the minutes go on.
“The continued gains in manufacturing production were bolstered by
growing demand from foreign trading partners, especially emerging market
economies,” the minutes add. “However, a few participants noted the
possibility that fiscal retrenchment in some foreign countries could
trigger a slowdown of those economies and hence weigh on the demand for
U.S. exports.”
And despite “some positive signals” on jobs, the minutes said
“participants were concerned about the scarcity of job openings, the
elevated level of unemployment, and the extent of longer-term
unemployment, which was seen as potentially leading to the loss of
worker skills. Moreover, the downward trend in initial unemployment
insurance claims appeared to have leveled off in recent weeks, while
hiring remained at historically low rates.”
“Information from business contacts and evidence from regional
surveys generally underscored the degree to which firms’ reluctance to
add to payrolls or start large capital projects reflected their concerns
about the economic outlook and uncertainty regarding future government
policies,” the minutes add.
The minutes reveal that “a number of participants pointed out that
the economic recovery could not be sustained over time without a
substantial pickup in job creation, which they still anticipated but had
not yet become evident in the data.”
Participants were also concerned that “activity in the housing
sector appeared to be leveling off in most regions despite various forms
of government support, and they noted that commercial and industrial
real estate markets continued to weaken.”
“Indeed, housing sales and starts had flattened out at depressed
levels, suggesting that previous improvements in those indicators may
have largely reflected transitory effects from the first-time homebuyer
tax credit rather than a fundamental strengthening of housing activity,”
the minutes continue. “Participants indicated that the pace of
foreclosures was likely to remain quite high; indeed, recent data on the
incidence of seriously delinquent mortgages pointed to the possibility
that the foreclosure rate could move higher over coming quarters.
Moreover, the prospect of further additions to the already very large
inventory of vacant homes posed downside risks to home prices.”
The majority was not concerned about the inflation outlook, the
minutes make clear.
“(P)articipants took note of signs that inflation expectations were
reasonably well anchored, and most agreed that substantial resource
slack was continuing to restrain cost pressures….,” they report.
“While all participants anticipated that inflation would be subdued over
the near term, a few noted that the risks to inflation expectations and
the medium-term inflation outlook might be tilted to the upside in light
of the large fiscal deficits and the extraordinarily accommodative
stance of monetary policy.”
Also noteworthy was the cautious approach the Fed staff took toward
shrinking the balance sheet, although that should not be too surprising
given the cautious and gradual approach Bernanke advocated in recent
Congressional testimony.
The Fed staff briefed the FOMC on potential approaches for managing
the Treasury securities held by the Federal Reserve.
“To date, the Desk had been reinvesting all maturing Treasury
securities by exchanging those holdings for newly issued Treasury
securities, but an alternative strategy would be to allow some or all of
those Treasury securities to mature without reinvestment,” the minutes
quote the staff as telling the FOMC.
“Redeeming all of its maturing Treasury holdings would
significantly reduce the size of the Federal Reserve’s balance sheet
over coming years and hence could be helpful in limiting the need to use
other reserve draining tools such as reverse repurchase agreements and
term deposits,” the minutes continue. “Redemptions would also lower the
interest rate sensitivity of the Federal Reserve’s portfolio over time.”
But the staff added a big word of warning: “Nevertheless, the
initiation of a redemption strategy might generate upward pressure on
market rates, especially if that measure led investors to move up their
expected timing of policy firming.”
[TOPICS: M$U$$$,M$$BR$,MMUFE$]
