NEW YORK – Despite “unsatisfactory” movement toward maximum employment and price stability, the Federal Open Market Committee agreed to keep the target range for the federal funds rate of 0 to ¼ percent and to leave unchanged the level of the combined holdings of Treasury, agency debt, and agency mortgage-backed securities in the SOMA.
The recovery continues slowly, the FOMC determined, and while data were mixed, it seemed to be strengthening later in the month. So with some uncertainty about the economy, the FOMC decided to gather more information before changing policy. “In addition, members wanted to consider further the most effective framework for calibrating and communicating any additional steps to provide such stimulus,” the minutes of the September 21 meeting showed.
“Several members noted that unless the pace of economic recovery strengthened or underlying inflation moved back toward a level consistent with the Committee’s mandate, they would consider it appropriate to take action soon.”
Members felt they should adjust the FOMC statement “to make it clear that underlying inflation had been running below levels that the Committee judged to be consistent with its mandate for maximum employment and price stability, in part to help anchor inflation expectations. 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.”
However, Thomas Hoenig, Federal Reserve Bank of Kansas City President, reiterated his opposition, saying keeping the expectation in the “statement would create conditions that could lead to macroeconomic and financial imbalances.”
Hoenig asserted that with the economy entering the second year of moderate recovery, the zero interest rate policy and “extended period” language were no longer appropriate. He added, the high level of unemployment can be attributed to “an extended period of exceptionally low rates earlier in the decade that contributed to the housing bubble and subsequent collapse and recession.”
Staff reviews concluded that expansion slowed recently, while inflation remained low. Private employment, and consumer spending improved moderately, while housing continued to weaken. Meanwhile, staff cut the forecast of growth next year but continued to anticipate a moderate strengthening of the expansion in 2011 as well as a further pickup in economic growth in 2012.
The August meeting decision to keep rates “was widely anticipated, but Treasury yields declined as investors reportedly focused on the indication in the accompanying statement that principal payments from agency debt and MBS in the Federal Reserve’s portfolio would be reinvested in longer-term Treasury securities and also on the characterization of the economic outlook, which was seen as somewhat more downbeat than expected.”
While a double-dip recession is not expected, “participants generally agreed that the in-coming data indicated that output and employment were increasing only slowly and at rates well below those recorded earlier in the year.”
Many participants “expressed concern that output growth, and the associated progress in reducing the level of unemployment, could be slow for some time,” the minutes said. “Participants noted a number of factors that were restraining growth, including low levels of household and business confidence, heightened risk aversion, and the still weak financial conditions of some households and small firms. A few participants noted that economic recoveries were often uneven and were typically slow following downturns triggered by financial crises. A number of participants observed that the sluggish pace of growth and continued high levels of slack left the economy exposed to potential negative shocks. Nevertheless, participants judged the economic recovery to be continuing and generally expected growth to pick up gradually next year.”
