By Steven K. Beckner

Underlying the FOMC factions were disagreements about inflation
risks.

“Many” FOMC participants thought that moderate expansion and “wide
margins of slack in labor and product markets” would mean “subdued
inflation,” and “some expressed the concern that…inflation might run
below mandate consistent levels for some time.”

“However, a couple of participants noted that the rate of inflation
over the past year had not fallen as much as would be expected if the
gap in resource utilization were large, suggesting that the level of
potential output was lower than some current estimates,” the minutes
say, and “some participants were concerned that inflation could rise as
the recovery continued.”

“A few participants argued that maintaining a highly accommodative
stance of monetary policy over the medium run would erode the stability
of inflation expectations.”

Two weeks after the FOMC’s formal meeting, it held a
videoconference on Nov. 28 and approved a six month extension of dollar
liquidity swaps with the European Central Bank and others and a 50 basis
point reduction in the swap rate.

Although only Richmond Fed President Jeffrey Lacker, voting as an
alternate for Plosser, dissented, the minutes reveal considerable
dissension over the matter.

Most thought the swap deal “agreed that such changes would
represent an important demonstration of the commitment of the Federal
Reserve and the other central banks to work together to support the
global financial system.” It was felt that lowering the swap rate would
reduce “the stigma” attached to borrowing from the central bank and that
the risks to the Fed were small.

But others had their doubts.

“Some participants commented that the proposed changes to the
swap lines would not by themselves address the need for additional
policy action by European authorities,” say the minutes. “Several
participants questioned whether the changes to the swap lines were
necessary at this time and worried that such changes could be seen as
suggesting greater concern about financial strains than was warranted.”

“It was also noted that the proposed reduction in pricing of the
existing swap arrangements could put the cost of dollar borrowing from
foreign central banks below the Federal Reserve’s primary credit rate
and that non-U.S. banks might be perceived to have an advantage in
meeting their short-term funding needs as a result.”

There was no desire to cut the discount rate to adjust for the
reduction in the swap rate, as MNI reported at the time.

“U.S. banks did not face difficulties obtaining liquidity in
short-term funding markets, and some participants felt that a cut in the
primary credit rate at the present time might incorrectly be seen as
suggesting concern about U.S. financial conditions,” say the minutes.

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** Market News International **

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