NEW YORK – The Federal Open Market Committee decided to hold monetary policy as it was since large-scale asset purchase programs “were nearing completion and neither the economic outlook nor financial conditions had changed appreciably since the December meeting,” according to minutes of the January 26-27 meeting, which were released today.
The FOMC affirmed its intention to purchase $1.25 trillion of agency mortgage-backed securities and $175 billion of agency debt by the end of the quarter and “gradually slow the pace of these purchases to promote a smooth transition in markets,” according to the minutes.
The minutes noted the FOMC will keep evaluating these purchases as the economic outlook evolves. However, while the ending of these purchases nears, the reference would need to be changed in its statement. One unnamed member suggested language that the FOMC “will evaluate its `holdings’ of securities,” but members felt such a move would be “premature.”
“The Committee also affirmed its 0 to ¼ percent target range for the federal funds rate and, based on the outlook for a gradual economic recovery, decided to reiterate its anticipation that economic conditions, including low levels of resource utilization, subdued inflation trends, and stable inflation expectations, were likely to warrant exceptionally low rates for an extended period,” the minutes relayed, and members agreed that rates would depend on how the economy evolves.
The panel also determined “that, with few exceptions, the functioning of most financial markets, including interbank markets, no longer showed significant impairment.” This led to a decision to relay the closing of the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility, and temporary liquidity swap arrangements on February 1.
The panel decided the size and composition of the Fed’s balance sheet would have to shrink “substantially over time” and that only U.S. Treasury securities should be in the System Open Market Account, with several members preferring shorter-term securities. “Participants agreed that a policy of redeeming and not replacing agency debt and MBS as those securities mature or are prepaid would contribute to achieving both goals and thus would be appropriate,” according to the minutes.
During a discussion of whether to continue using the federal funds rate for implementing monetary policy, “Many thought that an approach in which the primary credit rate was set above the Committee’s target for the federal funds rate and the IOER rate was set below that target—a corridor system— would be beneficial. Participants recognized, however, that the supply of reserve balances would need to be reduced considerably to lift the funds rate above the IOER rate. Several saw advantages to using the IOER rate, rather than a target for a market rate, to indicate the stance of policy. Participants noted that their judgments were tentative, that they would continue to discuss the ultimate operating regime, and that they might well gain useful information about longer run approaches during the eventual withdrawal of policy accommodation,” according to the minutes
In its forecast FOMC “staff revised up its estimate of the increase in real GDP in the fourth quarter of 2009. The upward revision was in inventory investment; the staff’s projection of the increase in final demand was unchanged,” the minutes said.
The FOMC expects a moderate recovery in “the next two years, with economic growth supported by the accommodative stance of monetary policy and by a further waning of the factors that weighed on spending and production over the past two years,” the minutes said.
Inflation is also expected to slow slightly in the next two years.
