Economy Still Too Weak To Alter QE2, FOMC Says

WASHINGTON — Members of the Federal Open Market Committee said they have “a fairly high threshold” for adjustments to the Treasury purchase plan known as Quantitative Easing 2, or QE2, according to minutes from their last meeting released Tuesday.

Members of the Federal Reserve Board’s policymaking body also expressed concern at the Dec. 14 meeting that state and local government fiscal conditions remain a detriment to growth.

The FOMC agreed to continue with the planned purchase of $600 billion of long-term Treasury securities by the end of the second quarter of 2011. Members said the pace and overall size of the purchase program “would be contingent on economic and financial developments.”

Members took note of the improving economy and said the Fed purchase plan “could trigger” undesirable increases in inflation and inflation expectations. They want to continue planning for the Fed’s “eventual exit” from its current exceptionally accommodative monetary policy.

FOMC members indicated that the ongoing deterioration of state and local fiscal positions is likely to be a drag on overall growth. They said the struggle among municipal governments to close budget gaps “could lead to sharp cuts in spending and increases in taxes.”

Federal Reserve Bank of Kansas City president Thomas M. Hoenig, who dissented at every FOMC meeting last year, said the Fed “should begin preparing markets for a reduction in policy accommodation” and added that the current monetary stance is “inconsistent” with its dual mandate of price stability and full employment.

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