NEW YORK – Economic indicators pointed to a slowing recovery, with output and employment stalling, according to the minutes of the Federal Open Market Committee’s August 10th meeting, which were released Tuesday, but FOMC members still expect recovery to gain strength next year.
Second quarter real gross domestic product was termed “noticeably weaker” than anticipated, with indications that the sluggishness continued into the third quarter. While the housing market’s “protracted downturn” in prices and investment “seemed to have ended,” the ups and downs caused by the homebuyer tax credits “made it difficult to be certain.”
Credit factors did not restrain investment spending by larger firms, but “small businesses continued to find credit hard to obtain,” although several members said “most small firms that requested credit were able to borrow, and that relatively few small firms thought that access to credit was their most important problem.”
Private sector payrolls showed sluggish growth and the drop in the unemployment rate “reflected a decrease in labor force participation rather than an increase in employment.”
While some members suggested “structural factors such as mismatches between unemployed workers’ skills and the needs of employers with job openings, or unemployed workers’ inability to move to a new locale, were contributing to the elevated level and long average duration of unemployment,” others “noted that employment was lower than a year earlier and that job openings were only slightly above their lowest level in 10 years, indicating that few firms saw a need to add employees.”
While still expecting recovery to continue and expand next year, incoming data showed “the economy was operating farther below its potential than they had thought, that the pace of recovery had slowed in recent months, and that growth would be more modest during the second half of 2010 than they had anticipated at the time of the Committee’s June meeting.”
Some debate ensued about whether the data suggested a weak recovery or whether the month-to-month fluctuations did not signal a change in outlook.
Inflation remains subdued, with many participants expecting inflation to remain below levels “consistent with the dual mandate to promote maximum employment and price stability.” Deflation, however is seen as “quite small,” but the risk of disinflation “increased somewhat.”
Committee members agreed to maintain a federal funds rate target of 0 to ¼ percent.
“Nonetheless, members generally judged that the economic outlook had softened somewhat more than they had anticipated, particularly for the near term, and some saw increased downside risks to the outlook for both growth and inflation,” the minutes say. “Some members expressed a concern that in this context any further adverse shocks could have disproportionate effects, resulting in a significant slowing in growth going forward. While no member saw an appreciable risk of deflation, some judged that the risk of further near-term disinflation had increased somewhat. More broadly, members generally saw both employment and inflation as likely to fall short of levels consistent with the dual mandate for longer than had been anticipated.”
Panel members also decided “it would be better to reinvest” principal repayments received on MBS or maturing agency debt in longer-term Treasury securities than in MBS. But some members “worried that reinvesting principal from agency debt and MBS in Treasury securities could send an inappropriate signal to investors about the Committee’s readiness to resume large-scale asset purchases.”
Some panel members “emphasized” that while developing and testing instruments “to facilitate an eventual exit from the period of unusually accommodative monetary policy, the Committee would need to consider steps it could take to provide additional policy stimulus if the outlook were to weaken appreciably further.”
Members agreed that “with the softer tone of recent data and the more modest near-term outlook ... changes to the statement’s characterization of the economic and financial situation were necessary.”
The statement noted, “All members but one judged that it was appropriate to reiterate the expectation that economic conditions—including low levels of resource utilization, subdued inflation trends, and stable inflation expectations— were likely to warrant exceptionally low levels of the federal funds rate for an extended period. One member argued that the recovery was proceeding about as outlined earlier this year and that starting a gradual process of removing policy accommodation fairly soon would better foster the Committee’s long-run objectives of maximum employment and price stability.”
Once again, Federal Reserve Bank of Kansas City President Thomas M. Hoenig dissented on the policy statement, claiming using the “extended period” language “could limit the Committee’s flexibility to begin raising rates modestly in a timely fashion,” and that the recovery “did not require support from additional accommodation in monetary policy.”
