The FOMC minutes contained little that was new or shocking, mostly confirming what was already known.
The committee reduced its forecasts for growth and inflation in the next three years, and increased its forecast for unemployment.
There remained some disagreement as to whether it is structural or cyclical factors that are mostly responsible for the negligible improvement in the unemployment rate, but for the most part the members understood that inflation remains below its mandate and supported further easing. Again, all of this was well known.
But there were still a few interesting points worth highlighting.
One was that the committee held an irregular video-conference call on October 15 to discuss a range of issues, including the possibility of pursuing some unorthodox measures: the possibility of setting a formal inflation target or a target price level (deciding against both), and targeting a yield on a certain term of Treasuries (no conclusion in the minutes, though obviously it has signaled no intention of doing this). The committee also discussed how incremental the Fed should be in purchasing long-term assets, choosing small and frequent rather than large and infrequent.
Otherwise, the committee explicitly mentioned the risks to the credit system of failing CRE loans and the mortgage putback problem:
Banking institutions reported signs of improving credit quality. Improvements in household financial conditions were contributing to better performance of consumer loans. However, banks continued to report elevated losses on commercial real estate loans, especially construction and land development loans. Participants noted the risk of losses at financial institutions stemming from investors putting mortgages back to sellers if the quality of the loans was misrepresented when the mortgages were sold into securitization vehicles.
And, as expected, the issue that brought about the most disagreement was about the risks to the outlook for inflation, but later rather than sooner:
Participants generally agreed that the most likely economic outcome would be a gradual pickup in growth with slow progress toward maximum employment. They also generally expected that inflation would remain, for some time, below levels the Committee considers most consistent, over the longer run, with maximum employment and price stability. However, participants held a range of views about the risks to that outlook. Most saw the risks to growth as broadly balanced, but many saw the risks as tilted to the downside. Similarly, a majority saw the risks to inflation as balanced; some, however, saw downside risks predominating while a couple saw inflation risks as tilted to the upside.
As we’ve said repeatedly, the reason the FOMC hasn’t become more fractious is that despite obvious disagreements about the potency of QE2 to help unemployment, the current disinflationary environment gives the hawks and doves something to agree on (agreeably). But that could change.
Related links:
FOMC minutes – FT Alphaville
FOMC, minutes and minutiae – FT Alphaville
When strange things happen at the zero lower bound – FT Alphaville
FOMC composition and future monetary policy – FT Alphaville