WASHINGTON (MNI) – The following is the second part of the text of
the Participants’ Views On Current Conditions and the Economic Outlook
portion of the Minutes of the June Federal Open Market Committee
meeting, released Wednesday, August 22:

Financial markets remained sensitive to ongoing developments
related to the sovereign debt and banking situation in the euro area,
and participants continued to view the possibility of an intensification
of strains in global financial markets as a significant downside risk to
the domestic economic outlook. Several participants indicated that
recent trends in euroarea equity indexes and sovereign debt yields had
not been encouraging, and some noted that the uncertainty prevailing in
global financial markets was showing through in a cautious posture of
investors. Nonetheless, participants generally agreed that conditions
in domestic credit markets remained more favorable than they were a year
ago. One participant pointed out that credit risk spreadswhile still
above prerecession normsmay have been boosted by safehaven demands
for Treasury securities and indicated that broader financial market
conditions seemed reasonably accommodative. Banks were reported to be
seeing an increase in their residential mortgage business along with a
continued rise in C&I lending, especially to large firms; consumer
credit was also increasing.

Participants discussed a number of policy tools that the Committee
might employ if it decided to provide additional monetary accommodation
to support a stronger economic recovery in a context of price stability.
One of the policy options discussed was an extension of the period over
which the Committee expected to maintain its target range for the
federal funds rate at 0 to 0.25% percent. 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.
Given the uncertainty attending the economic outlook, a few participants
questioned whether the conditionality of the forward guidance was
sufficiently clear, and they suggested that the Committee should
consider replacing the calendar date with guidance that was linked more
directly to the economic factors that the Committee would consider in
deciding to raise its target for the federal funds rate, or omit the
forward guidance language entirely.

Participants also exchanged views on the likely benefits and costs
of a new largescale asset purchase program. Many participants expected
that such a program could provide additional support for the economic
recovery both by putting downward pressure on longerterm 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.
Participants also discussed the merits of purchases of Treasury
securities relative to agency MBS. However, others questioned the
possible efficacy of such a program under present circumstances, and a
couple suggested that the effects on economic activity might be
transitory. In reviewing the costs that such a program might entail,
some participants expressed concerns about the effects of additional
asset purchases on trading conditions in markets related to Treasury
securities and agency MBS, but others agreed with the staff’s analysis
showing substantial capacity for additional purchases without disrupting
market functioning. Several worried that additional purchases might
alter the process of normalizing the Federal Reserve’s balance sheet
when the time came to begin removing accommodation. A few participants
were concerned that an extended period of accommodation or an
additional largescale asset purchase program could increase the risks
to financial stability or lead to a rise in longerterm inflation
expectations. Many participants indicated that any new purchase program
should be sufficiently flexible to allow adjustments, as needed, in
response to economic developments or to changes in the Committee’s
assessment of the efficacy and costs of the program.

Some participants commented on other possible tools for adding
policy accommodation, including a reduction in the interest rate paid
on required and excess reserve balances. While a couple of participants
favored such a reduction, several others raised concerns about possible
adverse effects on money markets. It was noted that the ECB’s recent cut
in its deposit rate to zero provided an opportunity to learn more about
the possible consequences for market functioning of such a move. In
light of the Bank of England’s Funding for Lending Scheme, a couple of
participants expressed interest in exploring possible programs aimed at
encouraging bank lending to households and firms, although the
importance of institutional differences between the two countries was
noted.

** MNI Washington Bureau: (202) 371-2121 **

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