FMOC Minutes

New Forecasts (central tendency and range of forecasts) in Table 1 below: Long-Run inflation forecast of 1.6-2.0% is basically their target; 2011 and 2012 unemployment forecasts revised up by 0.6-0.7%. Note that low-end of GDP forecast for 2011 is 2.5%. This is above many other forecasters.


Interesting Observations from FRB Staff; Outlook revised up, basically on assumption of improved financial conditions; and in turn inflation higher due to less slack and weaker $

The staff revised up its forecast for economic activity in 2011 and 2012. In light of asset market developments over the intermeeting period, which in large part appeared to reflect heightened expectations among investors that the Federal Reserve would undertake additional purchases of longer-term securities, the November forecast was conditioned on lower long-term interest rates, higher stock prices,
and a lower foreign exchange value of the dollar than was the staff’s previous forecast.

The downward pressure on inflation from slack in resource utilization was expected to be slightly less than previously projected, and prices of imported goods were anticipated to rise somewhat faster.

FOMC Members-Recap of debate of pros/cons of LSAPs; sizing LSAPs; and setting an inflation target, and setting a long-term interest rate target

Although participants considered it quite unlikely that the economy would slide back into recession, some noted that continued slow growth and high levels of resource slack could leave the economic expansion vulnerable to negative shocks. In the absence of such shocks, and assuming appropriate monetary policy

They do assume what they do has quite a bit of influence over the outcomes.

participants’ economic projections generally showed growth picking up to a moderate pace and the unemployment rate declining somewhat next year. Participants generally expected growth to strengthen further and unemployment to decline somewhat more rapidly in 2012 and 2013.

Several noted that the recent rate of output growth, if continued, would more likely be associated with an increase than a decrease in the unemployment rate.

While underlying inflation remained subdued, meeting participants generally saw only small odds of deflation, given the stability of longer-term inflation expectations

They remain steeped in inflation expectations theory as previously discussed.

and the anticipated recovery in economic activity.

Most saw the risks to growth as broadly balanced, but many saw the risks as tilted to the downside. Similarly, a majority saw the risks to inflation as balanced; some, however, saw downside risks predominating while a couple saw inflation risks as tilted to the upside.

Participants also differed in their assessments of the likely benefits and costs associated with a program of purchasing additional longer-term securities in an effort to provide additional monetary stimulus, though most saw the benefits as exceeding the costs in current circumstances. Most participants judged that a program of purchasing additional longer-term securities would put downward pressure on longer-term interest rates and boost asset prices; some observed that it could also lead to a reduction in the foreign exchange value of the dollar. Most expected these changes in financial conditions to help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with the Committee’s mandate. In addition, several participants argued that the stimulus provided by additional securities purchases would help protect against further disinflation and the small probability that the U.S. economy could fall into persistent deflation–an outcome that they thought would be very costly. Some participants, however, anticipated that additional purchases of longer-term securities would have only a limited effect on the pace of the recovery; they judged that the economy’s slow growth largely reflected the effects of factors that were not likely to respond to additional monetary policy stimulus and thought that additional action would be warranted only if the outlook worsened and the odds of deflation increased materially. Some participants noted concerns that additional expansion of the Federal Reserve’s balance sheet could put unwanted downward pressure on the dollar’s value in foreign exchange markets. Several participants saw a risk that a further increase in the size of the Federal Reserve’s asset portfolio, with an accompanying increase in the supply of excess reserves and in the monetary base, could cause an undesirably large increase in inflation.

This flies in the face of any understanding of banking and actual monetary operations, as well as recent Fed research.

However, it was noted that the Committee had in place tools that would enable it to remove policy accommodation quickly if necessary to avoid an undesirable increase in inflation.


Participants expressed a range of views about the potential costs and benefits of quantifying the Committee’s interpretation of its statutory mandate to promote price stability by adopting a numerical inflation objective or a target path for the price level. In the end, participants noted that the longer-run projections contained in the Summary of Economic Projections, which is released once per quarter in conjunction with the minutes of four of the Committee’s meetings, convey considerable information about participants’ assessments of their statutory objectives. Participants discussed whether it might be useful for the Chairman to hold occasional press briefings to provide more detailed information to the public regarding the Committee’s assessment of the outlook and its policy decision making than is included in Committee’s short post-meeting statements.


In their discussion of the relative merits of smaller and more frequent adjustments versus larger and less frequent adjustments in the Federal Reserve’s intended securities holdings, participants generally agreed that large adjustments had been appropriate when economic activity was declining sharply in response to the financial crisis. In current circumstances, however, most saw advantages to a more incremental approach that would involve smaller changes in the Committee’s holdings of securities calibrated to incoming data.


Finally, participants discussed the potential benefits and costs of setting a target for a term interest rate. Some noted that targeting the yield on a term security could be an effective way to reduce longer-term interest rates and thus provide additional stimulus to the economy. But participants also noted potentially large risks, including the risk that the Federal Reserve might find itself buying undesirably large amounts of the relevant security in order to keep its yield close to the target level.

No mention at all of the interest income channels, which act to reduce interest income in the economy as rates fall.

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6 Responses to FMOC Minutes

  1. strawberry picker says:

    Short of assets like stocks, bonds, and housing (and except for periods of hyperinflation) it is tough to cite any examples where inflation expectations mean a damn thing.

    Unthinking Economic Parrots

    Yet week in and week out, articles like the above parrot misguided ideas about inflation expectations. Worse yet, they spew forth nonsense that falling ideas are a bad thing.

    http://globaleconomicanalysis.blogspot.com/2010/11/unthinking-economic-parrots-and.html

    Mish talks about “inflation expectations” being damn silly too, I have told Mish in the past that you and him have very similar ideas on a lot of economic theory, damn shame he is too cocky to seriously consider your ideas Warren. When he ridiculed you for appearing on CNBC I gave him a lecturing that made him leave one of his favorite online posting boards. I sent a copy of the draft of your book to Calculated Risk, he probably considered it more seriously.

    Reply

  2. roger erickson says:

    euphoria here is beyond belief

    “money from any additional common stock sales would go straight to the Treasury”; [oh, be still my beating heart!!]

    I smell an inside rat (one that’s already dead anyway)

    Banks buy GM shares, making IPO largest ever Washington Post
    http://www.washingtonpost.com/wp-dyn/content/article/2010/11/26/AR2010112605018.html

    besides all this talk about “paying back” the Treasury, and “taxpayers getting their $ back”
    there’s euphoria over banks buying stock in what’s essentially a gov corp?

    we’re supposed to cheer aristocrats buying peasants with public currency? that is, when they’re not bypassing them altogether

    Reply

  3. roger erickson says:

    “THIS FLIES IN THE FACE OF ANY UNDERSTANDING OF BANKING AND ACTUAL MONETARY OPERATIONS, AS WELL AS RECENT FED RESEARCH.”

    Hmmmm, killer point.

    So, why isn’t this insight already on the “decision-support” display of every member of the Congress & Administration?

    What barriers are KEEPING this insight from being displayed where it belongs – where it would generate the most adaptive leverage for our country?

    Warren,
    You cannot do this alone. We need an operational PLAN for getting:
    the right insights,
    to the right people,
    in the right institutions,
    within ongoing critical periods (before adaptive windows of opportunity close)

    No one wants our best & brightest to die … having been ignored. The problem is systemic, beyond even the FED or Congress – it’s us, the US electorate.

    Reply

  4. rvm says:

    We have to put all the efforts in proving there is no operational need of government debt to be issued.
    When US government stops issuing debt there won’t be anything the debt terrorist to even talk about.

    Reply

    rvm Reply:

    I meant to post the above under the Bair post.

    Reply

    roger erickson Reply:

    Three cognitive hurdles abound in the populace.

    1) currency = real wealth (covered here by Warren)

    2) collateral-based currency creation (a flaw in banker training)

    3) Sovereign debt as a valuable part of “checks & balances”

    After talking to a few CB staff members trained in “economics” the root of many views on currency really does turn out to be a bank-centric reality.

    That approach restricts many small minds to the presumption that all currency creation by a CB has to be linked to some form of collateral, and that it will always, therefore, be necessary for a Central Bank to assign fixed collateral-value to currency creation – in the form of the yoked public/gov backing of an T-bond-auction-defined value – if nothing else.

    Many bankers are also deeply conditioned to perceive a “sovereign debt market as a check for spending”.

    That is, of course, a crude rule of thumb appropriate in the absence of other intelligence. It is not, however, the prescription for steering growth of a rapidly evolving, high-tech electorate.

    No wonder we’re officially off the gold-std, but still on it in our core beliefs and institutional practices!

    We have to invest in our kids, and trust in our kids, not saddle them with deep-seated fears about crossing arbitrarily invented boundaries.

    Reply

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