FOMC Minutes – August 31, 2010

Integral version.

In general, something for everybody. Looks like it puzzled the markets, but I think the focus tomorrow will be on FOMC unwillingness (for the time being) to “resume large-scale asset purchases”. My take:

Economic outlook. Little bit too positive in my view.

In the economic forecast prepared for the AugustFOMC meeting, the staff lowered its projection for theincrease in real economic activity during the secondhalf of 2010 but continued to anticipate a moderatestrengthening of the expansion in 2011. The softertone of incoming economic data suggested that thepace of the expansion would be slower over the nearterm than previously projected. Financial conditions,however, became somewhat more supportive of economicgrowth. Interest rates on Treasury securities,corporate bonds, and mortgages moved down further-over the inter-meeting period; the dollar reversed its April to June appreciation; and equity prices edgedhigher. Over the medium term, the recovery in economicactivity was expected to receive support fromaccommodative monetary policy, further improvementin financial conditions, and greater household andbusiness confidence. Over the forecast period, the increasein real GDP was projected to be sufficient toslowly reduce economic slack, although resource slackwas still anticipated to remain quite elevated at the endof 2011.

But a twist of reality further on:

In their discussion of the economic situation and outlook,meeting participants generally characterized theeconomic information received during the intermeetingperiod as indicating a slowing in the pace of recovery inoutput and employment in recent months. Real GDPgrowth was noticeably weaker in the second quarter of2010 than most had anticipated, and monthly data suggestedthat the pace of recovery remained sluggishgoing into the third quarter. Private payrolls and consumerspending had risen less than expected. Businessspending on equipment and software had increasedstrongly but reportedly was concentrated in replacementsand upgrades that had been postponed duringthe economic downturn. Investment in nonresidentialstructures continued to be weak. Housing starts andsales remained at depressed levels, falling back after theexpiration of the temporary homebuyer tax credits.The incoming data suggested that economic growthabroad had been somewhat stronger than anticipatedand remained solid, boosting U.S. exports and supportinga pickup in U.S. manufacturing output and employment,though a surprising surge in imports in thesecond quarter widened the U.S. trade deficit.

And another twist:

Weighing the available information, participants againexpected the recovery to continue and to gatherstrength in 2011. Nonetheless, most saw the incomingdata as indicating that the economy was operatingfarther below its potential than they had thought, thatthe pace of recovery had slowed in recent months, andthat growth would be more modest during the secondhalf of 2010 than they had anticipated at the time of the Committee’s June meeting.

No possibility of deflation?

While nomember saw an appreciable risk of deflation, some judged that the risk of further near-term disinflation had increased. somewhat.

QE 1.1 Lite having small effect:

The decline in mortgage rates since spring wasgenerating increased mortgage refinancing activity thatwould accelerate repayments of principal on MBS heldin the SOMA. Private investors would have to holdmore longer-term securities as the Federal Reserve’sholdings ran off, making longer-term interest ratessomewhat higher than they would be otherwise. Mostmembers thought that the resulting tightening of financialconditions would be inappropriate, given the economicoutlook. However, members noted that the magnitude of the tightening was uncertain, and a fewthought that the economic effects of reinvesting principal from agency debt and MBS likely would be quite small.

Saving the last bullet?

A few members worried that reinvesting principal from agencydebt and MBS in Treasury securities could send an inappropriate signal to investors about the Committee’sreadiness to resume large-scale asset purchases.

Mr. Hoenig?

Another member argued that reinvesting repayments ofprincipal from agency debt and MBS, thereby postponinga reduction in the size of the Federal Reserve’s balancesheet, was likely to complicate the eventual exitfrom the period of exceptionally accommodative monetarypolicy and could have adverse macroeconomicconsequences in future years.


This entry was posted on Tuesday, August 31st, 2010 at 1:52 pm and is filed under Markets, U.S. Economic Data. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

One Response to “FOMC Minutes – August 31, 2010”

  1. FOMC Statement Preview | Tainted Alpha Says:

    […] there was some reservation and conflicting views during the last FOMC meeting on the reinvestment of agency and MBS debt […]


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