NEW YORK – Members of the Federal Open Market Committee deemed it necessary to act to promote a stronger economic recovery since progress toward the dual mandate of maximum employment and price stability was termed “disappointingly slow,” with the consensus being it would remain slow, according to minutes of the meeting November 2-3, which were released Tuesday.
“Accordingly, most members judged it appropriate to take action to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with the Committee’s mandate,” the minutes noted.
The panel agreed to keep the federal funds rate target at 0 to ¼% and to expand the Federal Reserve’s holdings of longer-term securities, by reinvesting principal payments from its securities holdings into longer-term Treasury securities, and by buying $600 billion of longer-term Treasury securities at a pace of about $75 billion per month through the second quarter of 2011.
“With respect to the statement to be released following the meeting, members agreed that it was appropriate to adjust the statement to make it clear that the unemployment rate was elevated, and that measures of underlying inflation were somewhat low, relative to levels that the Committee judged to be consistent, over the longer run, with its dual mandate. Nearly all members agreed that the statement should reiterate the expectation that economic conditions were likely to warrant exceptionally low levels of the federal funds rate for an extended period. Members agreed that the statement should note that the Committee will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.”
Federal Reserve Bank of Kansas City President Thomas Hoenig dissented, the minutes said “because he judged that additional accommodation would do little to accelerate the economy’s continuing, gradual recovery. In his assessment, the risks of additional purchases of Treasury securities outweighed the benefits. Mr. Hoenig believed that additional purchases would risk a further misallocation of resources and future financial imbalances that could destabilize the economy. He also saw a potential for additional purchases to undermine the Federal Reserve’s independence and cause long-term inflation expectations to rise. Mr. Hoenig also believed it was not appropriate to indicate that economic and financial conditions were ‘likely to warrant exceptionally low levels of the federal funds rate for an extended period’ or to reinvest principal payments from agency debt and mortgage-backed securities in long-term Treasury securities. In his assessment, this continued high level of monetary policy accommodation could put at risk the achievement of the Committee’s long-run policy objectives.”
Low confidence levels, of businesses and households, were cited as a factor restraining growth, as were “concerns about the durability of the economic recovery, continuing uncertainty about the future tax and regulatory environment, still-weak financial conditions of some households and small businesses, the depressed housing market, and waning fiscal stimulus.”
While the panel doesn’t expect a new recession, the belief is “continued slow growth and high levels of resource slack could leave the economic expansion vulnerable to negative shocks.”
The panel expects better growth and a decline in unemployment next year. “Participants generally expected growth to strengthen further and unemployment to decline somewhat more rapidly in 2012 and 2013,” the minutes noted.
Several members said the current rate “of output growth, if continued, would more likely be associated with an increase than a decrease in the unemployment rate.” While the panel agreed that structural factors have contributed to the high jobless rate, but differed on the magnitude of these effects.
“Many participants saw evidence that the current unemployment rate was well above levels that could be explained by structural factors alone, noting, for example, reports from business contacts indicating that weak growth in demand for their firms’ products remained a key reason why they were reluctant to add employees, and job vacancy rates that were low relative to historical experience,” the minutes said.
