–Changes In Financial Conditions Led Most On FOMC To Revise Down Outlk
By Brai Odion-Esene
WASHINGTON (MNI) – In their monetary policy discussions June 22-23,
members of the Federal Open Market Committee agreed that the U.S.
economic outlook had “softened somewhat,” with risks to the outlook
having shifted to the downside, meaning the body would need to consider
if more easing is necessary if the situation were to worsen
“appreciably.”
In the minutes of the meeting released by the Federal Reserve
Wednesday, officials of the central bank also lowered their forecasts
for economic growth this year, with most influenced by the changing
conditions in the financial markets.
Looking ahead, “Members noted that in addition to continuing to
develop and test instruments to exit from the period of unusually
accommodative monetary policy, the Committee would need to consider
whether further policy stimulus might become appropriate if the outlook
were to worsen appreciably,” the minutes said.
Additionally, in light of the slightly softer tone of recent data
and the shift to less accommodative financial conditions, the minutes
said the FOMC agreed that “some changes to the statement’s
characterization of the economic and financial situation were
necessary.”
They viewed incoming data and information received from business
contacts as consistent with a continued, moderate recovery in economic
activity, and the economic expansion in the U.S. as likely to be strong
enough to continue raising resource utilization, albeit more slowly than
they had previously anticipated.
“However, financial markets were generally seen as recently having
become less supportive of economic growth, largely reflecting
international spillovers from European fiscal strains,” the minutes
said.
In part due to the change in financial conditions, most on the FOMC
revised down slightly their outlook for economic growth, it continued,
and about one half of the Committee judged the balance of risks to
growth as having moved to the downside.
However, according to the minutes, “the changes to the outlook were
viewed as relatively modest and as not warranting policy accommodation
beyond that already in place.”
In the economic projections of Fed governors and Reserve presidents
released in conjunction with the minutes, the central tendency for real
GDP was 3%-3.5% in 2010 and 3.5%-4.2% in 2011. Both are down from April
GDP forecasts of 3.2%-3.7% and 3.4%-4.5%, respectively.
They predicted the unemployment rate to range from 9.25% to 9.5%
this year, 8.3% to 8.7% the next. Core PCE inflation was predicted to
range from 0.8% to 1.0% in 2010, and then 0.9% to 1.3% in 2011.
“Most participants continued to see the risks to inflation as
balanced,” the minutes said. “They saw inflation as likely to stabilize
near recent low readings in coming quarters and then gradually rise
toward more desirable levels.”
The minutes said nearly all members, with the exception of Kansas
City’s Thomas Hoenig, judged it appropriate to reiterate the expectation
that economic conditions — including low levels of resource
utilization, subdued inflation trends, and stable inflation expectations
— were likely to warrant exceptionally low levels of the federal funds
rate for an extended period.
On the matter of the Fed’s swollen balance sheet, the minutes said
many on the FOMC saw benefits to eventually reinvesting in Treasury
bills and shorter-term coupon issues to shift the maturity composition
of the Fed’s portfolio toward the structure that had prevailed prior to
the financial crisis. However, no change to its reinvestment policy was
made at this meeting.
As for the timing of asset sales, while the entire FOMC continued
to agree that gradual sales of mortgage-backed securities should be
undertaken, they once again diverged on exactly when they should begin.
“A few participants supported beginning such sales fairly soon,”
the minutes said, “given the evident demand in the market for safe,
longer-term assets, modest sales of MBS might not put much, if any,
upward pressure on long term interest rates or be disruptive to the
functioning of financial markets.”
On the other side of the debate, “many participants still saw asset
sales as potentially tightening financial conditions to some extent.”
Most Committee members continued to judge it appropriate to defer
asset sales “for some time,” the minutes said, adding, “several noted
the modest weakening in the economic outlook since the Committee’s last
meeting as an additional reason to do so.”
The majority do not see asset sales commencing until after the
Committee begins to firm policy by increasing short-term interest rates.
“Such an approach would postpone asset sales until the economic
recovery was well established and maintain short-term interest rates as
the Committee’s key monetary policy tool,” the minutes said.
** Market News International Washington Bureau: 202-371-2121 **
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