UPDATE: Having chewed on these for a little while, it seems the momentum on the committee is towards doing something more accomodative at the next meeting in September.
More than we had realised, anyway. We were completely unsure about this after Jackson Hole, and we don’t really know anything now. The minutes don’t tell us, for instance, which steps the more dove-ish members would prefer in which order, or what they think are the dangers associated with each.
But the minutes still suggest that despite all the disagreement and the three dissenters, there’s more appetite for further measures, be it Operation Twist or lower interest on reserves. Outright QE3 in the form of large scale asset purchases still seems unlikely to us, but everything appears to at least be on the table. Though we could be wrong…
We took a few liberties with the order of the latest minutes, but we’ll let the excerpts do most of the talking for us.
(Emphasis ours in all cases.)
What the committee thought about doing but didn’t, or, Shout now and Twist later:
Participants discussed the range of policy tools available to promote a stronger economic recovery should the Committee judge that providing additional monetary accommodation was warranted. Reinforcing the Committee’s forward guidance about the likely path of monetary policy was seen as a possible way to reduce interest rates and provide greater support to the economic expansion; a few participants emphasized that guidance focusing solely on the state of the economy would be preferable to guidance that named specific spans of time or calendar dates. Some participants noted that additional asset purchases could be used to provide more accommodation by lowering longer-term interest rates. Others suggested that increasing the average maturity of the System’s portfolio–perhaps by selling securities with relatively short remaining maturities and purchasing securities with relatively long remaining maturities–could have a similar effect on longer-term interest rates. Such an approach would not boost the size of the Federal Reserve’s balance sheet and the quantity of reserve balances. A few participants noted that a reduction in the interest rate paid on excess reserve balances could also be helpful in easing financial conditions.
Discussing what it ultimately did:
Those viewing a shift toward more accommodative policy as appropriate generally agreed that a strengthening of the Committee’s forward guidance regarding the federal funds rate, by being more explicit about the period over which the Committee expected the federal funds rate to remain exceptionally low, would be a measured response to the deterioration in the outlook over the intermeeting period. …
The Committee agreed to keep the target range for the federal funds rate at 0 to 1/4 percent and to state that economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. That anticipated path for the federal funds rate was viewed both as appropriate in light of most members’ outlook for the economy and as generally consistent with some prescriptions for monetary policy based on historical and model-based analysis.
And hello Fisher, Kocherlakota, Plosser:
In contrast, some participants judged that none of the tools available to the Committee would likely do much to promote a faster economic recovery, either because the headwinds that the economy faced would unwind only gradually and that process could not be accelerated with monetary policy or because recent events had significantly lowered the path of potential output. Consequently, these participants thought that providing additional stimulus at this time would risk boosting inflation without providing a significant gain in output or employment.
The doves settle… for now:
A few members felt that recent economic developments justified a more substantial move at this meeting, but they were willing to accept the stronger forward guidance as a step in the direction of additional accommodation.
And some details on the Fed’s super-secret video conference to make contingency plans in case the debt ceiling was breached:
On August 1, 2011, the Committee met by videoconference to discuss issues associated with contingencies in the event that the Treasury was temporarily unable to meet its obligations because the statutory federal debt limit was not raised or in the event of a downgrade of the U.S. sovereign credit rating. The staff provided an update on the debt limit status, conditions in financial markets, plans that the Federal Reserve and the Treasury had developed regarding the processing of federal payments, potential implications for bank supervision and regulatory policies, and possible actions that the Federal Reserve could take if disruptions to market functioning posed a threat to the Federal Reserve’s economic objectives. Participants generally anticipated that there would be no need to make changes to existing bank regulations, the operation of the discount window, or the conduct of open market operations. A number of participants emphasized that the Federal Reserve would continue to employ market values of securities in its transactions. With respect to potential policy actions, participants agreed that the appropriate response would depend importantly on the actual conditions in markets and should generally consist of standard operations. Some participants noted that such an approach would maintain the traditional separation of the Federal Reserve’s actions from the Treasury’s debt management decisions.
FOMC statement for Aug 9 – FT Alphaville