NEW YORK - Federal Open Market Committee members were presented three options for tending to the System Open Market Account balance sheet at their last meeting, which resulted in a Twist, but members were also briefed on a reinvestment maturity extension program and a large-scale asset purchase program, according to the minutes of its Sept. 20-21 meeting, which were released Wednesday.
The first option would result in the Fed using principal payment s from its agency securities to buy long-term Treasuries, while the third option would have the Fed simply buy longer-term Treasuries. Also discussed was cutting the interest rate the Fed pays depository institutions on reserve balances.
As evidenced by the unusually large number of dissents, the minutes said “participants expressed a range of views on the potential efficacy of policy tools tied to the size and composition of the Federal Reserve’s balance sheet.”
Participants deemed “large-scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted,” although some said the plan “would be more likely to raise inflation and inflation expectations than to stimulate economic activity.”
Participants also worried that a maturity extension program or large-scale asset purchase program could have a negative impact on market functioning.
“Most participants indicated that they favored taking steps to increase further the transparency of monetary policy, including providing more information about the Committee’s longer-run policy objectives and about the factors that influence the Committee’s policy decisions. Participants generally agreed that a clear statement of the Committee’s longer-run policy objectives could be helpful; some noted that it would also be useful to clarify the linkage between these longer-run objectives and the Committee’s approach to setting the stance of monetary policy in the short and medium run.” But some members raised questions of how accurate “explicit longer-run objectives for the unemployment rate or other measures of labor market conditions” would be given influence of nonmonetary factors.
The panel also agreed that its post-meeting statements do not “communicate fully the Committee’s thinking about its objectives and its policy framework, and agreed that the Committee would need to use other means to communicate that information or to supplement information in the statement,” according to the minutes.
Members were wary that more “guidance” about “economic conditions” the guidance refers to would be misinterpreted as a statement of FOMC objectives.
Cutting the interest rate the Fed pays depository institutions on its reserves held at the bank, would need more discussion and investigation as to whether the move “risked costly disruptions to money markets and to the intermediation of credit.”
The Fed staff saw expansion still slow, labor markets weak and inflation moderating. The financial markets were termed “volatile,” resulting from “downbeat news” on the economy, with European concerns adding to volatility.
“The expected path of the federal funds rate moved down appreciably over the intermeeting period. Investors initially focused on the firmer forward guidance in the August FOMC statement indicating that the Committee anticipated that economic conditions were likely to warrant exceptionally low levels of the federal funds rate at least through mid-2013. Over subsequent weeks, weak economic data contributed to rising expectations of additional monetary accommodation; those expectations and increasing concerns about the financial situation in Europe led to an appreciable decline in intermediate- and longer-term nominal Treasury yields,” according to the minutes.
The staff also cut projections for GDP, but expect “more rapid” economic activity in the second half, but still not enough to bring unemployment rates down in any significant way. Inflation projections were nearly steady.
“Recent indicators pointed to continuing weakness in overall labor market conditions, and the unemployment rate remained elevated. Inflation appeared to have moderated since earlier in the year as prices of energy and some commodities declined from their peaks, but inflation had not yet come down as much as participants had expected earlier this year. Labor costs remained subdued,” the minutes reported.
Participants expect the pace of recovery to rise in the coming quarters. But, they “continued to see the outlook for growth and inflation as more uncertain than usual.”
Consumer spending picked up, but households remained “pessimistic about their future incomes, and consumer confidence had dropped to historically low levels. Low confidence, continuing efforts to repair balance sheets, and heightened caution in the face of an uncertain economic environment were seen as factors likely to weigh on household spending. Several participants pointed to depressed home prices and financial constraints, including still-tight credit conditions for many households, as also likely to restrain consumer spending for a time.”
But, the panel noted debt-service obligations were down, signaling better balance sheets.
Members generally agreed that the outlook “warranted some additional monetary policy accommodation to support a stronger recovery and to help ensure that inflation, over time, was at a level consistent with the Committee’s dual mandate. While they recognized that monetary policy alone could not completely address the economy’s ills, most members judged that additional accommodation could contribute importantly to better outcomes in terms of the Committee’s dual mandate of maximum employment and price stability.”
The maturity extension program was the favored method of accommodation. “They expected this program to put downward pressure on longer-term interest rates and to help make broader financial conditions more accommodative. While the scale of such a maturity extension program was necessarily limited by the amount of shorter-term securities in the SOMA portfolio, most members judged the action as appropriate, given economic conditions and the outlook,” the minutes noted.
The minutes reported that two members said conditions “could justify stronger policy action, but they supported undertaking the maturity extension program at this meeting as it did not rule out additional steps at future meetings. Three members concluded that additional accommodation was not appropriate at this time.”
The panel decided to specify parameters of the program.
