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Monday, August 27, 2012

FOMC Minutes - New stimulus measures on sight?

Here are the most relevant quotes from the minutes of the Federal Open Market Committee of July 31st - August 1st, the impression is that further easing in monetary policy is a probable option for the near future.
On August 31st- September 1st, at the Jackson Hole Economic Symposium, some announcement and/or clarification is expected but, probably, the FED will wait till September to take action.

FOMC minutes August 1st

Economic situation

The information reviewed at the July 31-August 1 meeting indicated that economic activity increased at a slower pace in the second quarter than earlier in the year and that labor market conditions had improved little in recent months. In the second quarter, consumer price inflation was markedly lower than in the first quarter, mostly reflecting substantial declines in consumer energy prices, while measures of longer-run inflation expectations remained stable.
Private nonfarm employment expanded in June at about the same modest pace as in the second quarter as a whole, and government employment decreased slightly. The unemployment rate was 8.2 percent in June, the same as its average during the first half of the year. The rate of long-duration unemployment stayed elevated, and the share of workers employed part time for economic reasons was still high. Indicators of job openings and firms' hiring plans were generally subdued. While initial claims for unemployment insurance trended down a bit over the intermeeting period, they remained at a level consistent with continued modest increases in employment in the coming months.
Manufacturing production decelerated significantly in the second quarter following a large gain in the first quarter, while the rate of manufacturing capacity utilization was unchanged on balance. The production of motor vehicles and parts increased considerably last quarter, but factory output outside of the motor vehicle sector was essentially flat.
Real personal consumption expenditures increased at a slower rate in the second quarter than in the first quarter, primarily reflecting a decrease in spending for motor vehicles. Meanwhile, real disposable personal income rose at a faster pace than consumer spending in both the first and second quarters, boosted in part in recent months by lower energy prices. Consumer sentiment as measured by the Thomson Reuters/University of Michigan Surveys of Consumers (Michigan Survey) was more downbeat in June and July than earlier in the year.
Conditions in the housing market generally improved further in recent months, but activity remained at a low level against the backdrop of the large inventory of foreclosed and distressed properties and tight underwriting standards for mortgage loans. Both starts and permits of new single-family homes increased in the second quarter. Starts of new multifamily units were about the same last quarter as in the previous quarter, but permits rose, which pointed to higher multifamily construction in the coming months. Home prices increased in May for the fifth consecutive month. Sales of new homes in the second quarter were moderately higher than in the first quarter, but existing home sales decreased slightly.
Real business expenditures on equipment and software rose in the second quarter at a faster pace than in the first quarter. However, new orders for nondefense capital goods excluding aircraft decreased last quarter, and the backlog of unfilled orders decelerated sharply. Other recent forward-looking indicators, such as surveys of business conditions and capital spending plans, also suggested that increases in outlays for business equipment would slow in coming months. Real business spending for nonresidential construction increased somewhat in the second quarter but remained at a relatively low level.
Real federal government purchases decreased a little in the second quarter, following a much sharper decline in the previous three quarters, as the continued contraction in defense spending eased.
The U.S. international trade deficit narrowed in May, as exports edged up and imports declined.
Consumer food prices posted only a small increase last quarter, but the recent sizable run-up in spot and futures prices of farm commodities, reflecting the effects of the drought and hot weather in the midwestern part of the United States, pointed to some temporary upward pressures on retail food prices later this year. Consumer prices excluding food and energy increased more moderately in the second quarter than in the first. Near-term inflation expectations from the Michigan Survey rose a little in June and July, while longer-term inflation expectations in the survey continued to be stable.
Foreign economic growth continued to be subdued, as fiscal retrenchment and financial stresses in the euro area continued to weigh on economic activity in Europe and elsewhere. Recent indicators of production and confidence in the euro area remained weak, and the preliminary second-quarter estimate of real GDP in the United Kingdom showed a contraction. Real GDP in China accelerated somewhat in the second quarter following a relatively weak expansion in the first quarter, and recent monthly data suggested some further improvement. However, data for other emerging market economies generally pointed to a deceleration in economic activity last quarter. Foreign inflation eased in the second quarter and remains well contained, as earlier declines in the prices of energy and other commodities passed through to the retail level.

Financial Situation

Several factors influenced developments in financial markets since the time of the June FOMC meeting. Generally weaker-than-expected economic data in the United States, concerns about the fiscal and banking situation in the euro area, and the outlook for global economic growth weighed on investor sentiment. However, the effects of these factors were offset to some extent by actual and expected easing of monetary policy in the United States and abroad and by better-than-anticipated profits at some S&P 500 firms.
Interest rates generally moved down, on net, over the intermeeting period. The yield on nominal 10-year Treasury securities declined to a historically low level, partly due to a lower expected path of the federal funds rate, the continuation of the maturity extension program announced at the June FOMC meeting, and perceptions of an increased likelihood that the Federal Reserve will ease monetary policy further.
The staff's broad nominal index for the foreign exchange value of the dollar changed little, on net, over the intermeeting period, although the dollar appreciated against the euro. Financial markets in the euro area were volatile, as a deterioration in market sentiment gave way to periods of optimism following the euro-area summit in late June, the decision by the European Central Bank (ECB) to ease policy in early July, and indications from the ECB later in July that the central bank might take further steps to support the monetary union. On net, European stock markets finished the period higher. Yield spreads on Spanish and Italian 10-year bonds over their German equivalents, which rose sharply over most of July, fell back from their intermeeting peaks but remained elevated.
Several foreign central banks eased monetary policy over the intermeeting period. The ECB cut its benchmark policy rate by 25 basis points and reduced the rate on its overnight deposit facility to zero. The Bank of England increased the size of its asset purchase program and announced details on its new program designed to boost bank lending to the nonfinancial sector. The central banks of Brazil, China, and South Korea all reduced official rates as well. Amid policy easing in the euro area and United Kingdom, yields on German and U.K. sovereign bonds declined, with two-year German sovereign bonds trading at yields below zero.

Economic Outlook

In the economic forecast prepared by the staff for the July 31-August 1 FOMC meeting, the near-term projection for real GDP growth was revised down somewhat. The revision primarily reflected a slower pace of consumer spending than the staff expected at the time of the previous projection, along with a deterioration in some forward-looking indicators. However, the staff's medium-term forecast for real GDP growth was little changed, as the slightly weaker underlying pace of economic activity suggested by the recent data was roughly offset by the anticipated effects of the continuation of the maturity extension program announced following the June FOMC meeting, which had not been incorporated in the previous projection. With the restraint from fiscal policy assumed to increase next year, the staff projected that increases in real GDP would not significantly exceed the growth rate of potential output in 2013. Thereafter, economic activity was expected to accelerate gradually, supported by an eventual easing in fiscal policy restraint, gains in consumer and business sentiment, further improvements in credit conditions, and continued accommodative monetary policy. The expansion in economic activity was anticipated to reduce the substantial margin of slack in labor and product markets only slowly over the projection period, and the unemployment rate was expected to remain elevated at the end of 2014.
The staff's forecast for inflation was little changed from the projection prepared for the June FOMC meeting. With crude oil prices expected to decline a bit from their current levels, the boost to retail food prices from the current drought in the Midwest anticipated to be only temporary and relatively small, longer-run inflation expectations remaining stable, and substantial resource slack persisting over the forecast period, the staff continued to project that inflation would be subdued through 2014.

Participants' Views on Current Conditions and the Economic Outlook

In their discussion of the economic situation and the outlook, meeting participants agreed that the information received since the Committee met in June suggested that economic activity had decelerated in recent months to a slower pace than they had anticipated. Indicators of manufacturing activity had softened. Recent monthly gains in payroll employment had continued to be small, and the unemployment rate in June remained at an elevated level. Consumer price inflation had been low in recent months, as declines in the costs of crude oil were passed through to retail energy prices. Longer-term inflation expectations had remained stable.

Regarding the economic outlook, most participants agreed that
economic growth was likely to remain moderate over coming quarters and then pick up gradually. Some participants expressed concern about the persistent headwinds restraining the pace of the recovery, including the weak housing sector, still-tight borrowing conditions for some households and firms, and fiscal restraint at all levels of government. 

Financial markets remained sensitive to ongoing developments related to the sovereign debt and banking situation in the euro area, and participants continued to view the possibility of an intensification of strains in global financial markets as a significant downside risk to the domestic economic outlook. Several participants indicated that recent trends in euro-area equity indexes and sovereign debt yields had not been encouraging, and some noted that the uncertainty prevailing in global financial markets was showing through in a cautious posture of investors. Nonetheless, participants generally agreed that conditions in domestic credit markets remained more favorable than they were a year ago. 
Participants discussed a number of policy tools that the Committee might employ if it decided to provide additional monetary accommodation to support a stronger economic recovery in a context of price stability. One of the policy options discussed was an extension of the period over which the Committee expected to maintain its target range for the federal funds rate at 0 to 1/4 percent. It was noted that such an extension might be particularly effective if done in conjunction with a statement indicating that a highly accommodative stance of monetary policy was likely to be maintained even as the recovery progressed.
Participants also exchanged views on the likely benefits and costs of a new large-scale asset purchase program. Many participants expected that such a program could provide additional support for the economic recovery both by putting downward pressure on longer-term interest rates and by contributing to easier financial conditions more broadly. In addition, some participants noted that a new program might boost business and consumer confidence and reinforce the Committee's commitment to making sustained progress toward its mandated objectives. A few participants were concerned that an extended period of accommodation or an additional large-scale asset purchase program could increase the risks to financial stability or lead to a rise in longer-term inflation expectations. Many participants indicated that any new purchase program should be sufficiently flexible to allow adjustments, as needed, in response to economic developments or to changes in the Committee's assessment of the efficacy and costs of the program.
It was noted that the ECB's recent cut in its deposit rate to zero provided an opportunity to learn more about the possible consequences for market functioning of such a move. In light of the Bank of England's Funding for Lending Scheme, a couple of participants expressed interest in exploring possible programs aimed at encouraging bank lending to households and firms, although the importance of institutional differences between the two countries was noted.

Committee Policy Action

The information received over the intermeeting period indicated that economic activity had decelerated in recent months, with a notable slowing in consumer spending.  Members generally expected that economic growth would be moderate over coming quarters and then would pick up very gradually. While most members did not view the medium-run economic outlook as having changed significantly since the June meeting, several noted that they had lowered their expectations for economic growth over coming quarters.  A number of members noted that if the recent modest rate of economic growth were to persist, the economy would be less able to weather a material adverse shock without slipping back into recession. Most members continued to anticipate that, with longer-term inflation expectations stable and the existing slack in resource utilization being taken up very gradually, inflation would run over the medium term at a rate at or below the Committee's objective of 2 percent. In contrast, one member thought that the economy may be operating near its current potential and, thus, that maintaining the Committee's current highly accommodative policy stance well into 2014 would pose upside risks to the inflation outlook.

The Committee had provided additional accommodation at its previous meeting by announcing the continuation of the maturity extension program through the end of the year, and more time was seen as necessary to evaluate the effects of that decision.  A number of them indicated that additional accommodation could help foster a more rapid improvement in labor market conditions in an environment in which price pressures were likely to be subdued. Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery. Several members noted the benefits of accumulating further information that could help clarify the contours of the outlook for economic activity and inflation as well as the need for further policy action. One member judged that additional accommodation would likely not be effective in improving the economic outlook and viewed the potential costs associated with such action as unacceptably high. At the conclusion of the discussion, members agreed that they would closely monitor economic and financial developments and carefully weigh the potential benefits and costs of various tools in assessing whether additional policy action would be warranted.
 Many members expressed support for extending the Committee's forward guidance, but they agreed to defer a decision on this matter until the September meeting in order to consider such an adjustment in the context of updates to participants' individual economic projections and the Committee's further consideration of its policy options. The statement also reiterated the Committee's intention to extend the average maturity of its securities holdings as announced in June. Consistent with the concerns expressed by many members about the slow pace of the economic recovery, the downside risks to economic growth, and the considerable slack in resource utilization, the Committee decided that the statement should conclude by indicating that it will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

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