The Federal Open Market Committee members' views on monetary policy aren't as unified as their June statement implied. In the meeting minutes (.pdf) released today, it's pretty clear that there is considerable disagreement on how the various parts of the economy may fare and what actions should be taken. Three parts of their discussions make this pretty clear.
Economic Projections Worsen
First, their economic projections worsened since April, so this is more a case of the economists disagreeing with themselves. They now believe that the recovery is moving a little more slowly than they expected. As a result, they think unemployment will remain a little bit higher, GDP growth will be a little bit weaker, and inflation will be a little bit lower:
Inflation, Deflation, or Stability?
Speaking of inflation in particular, there's fairly significant disagreement about the path prices are on. Some of the economists worry about deflation, while another (Kansas City President Thomas Hoenig) was so concerned with inflation that he dissented altogether. Here's an excerpt:
Some participants judged the risks to the outlook for inflation as tilted to the downside, particularly in the near term, in light of the large amount of resource slack already prevailing in the economy, the significant downside risks to the outlook for real activity, and the possibility that inflation expectations could begin to decline in response to low actual inflation. A few participants cited some risk of deflation. Other participants, however, thought that inflation was unlikely to fall appreciably further given the stability of inflation expectations in recent years and very accommodative monetary policy. Over the medium term, participants saw both upside and downside risks to inflation. Several participants noted that a continuation of lower than-expected inflation and high unemployment could eventually lead to a downward movement in inflation expectations that would reinforce disinflationary pressures. By contrast, a few participants noted the possibility that a potentially unsustainable fiscal position and the size of the Federal Reserve's balance sheet could boost inflation expectations and actual inflation over time.
Asset Sales, Asset Purchases, or Hold?
During the financial crisis, the Fed bloated its balance sheet by purchasing various types of securities to keep credit flowing. One of its biggest targets was mortgage-backed securities (MBS). Eventually, the Fed will have to begin selling this MBS, but when? Again, there's broad disagreement. If the economy unexpectedly strengthens, then these assets should probably be disposed of sooner than later. If deflation manifests itself, then additional purchases might be necessary to curb it. Here's the debate:
Continuing a discussion from previous meetings, participants again addressed issues regarding asset sales. Participants continued to agree that gradual sales of MBS should be undertaken, at some point, to speed the return to a Treasury-securities-only portfolio. A few participants supported beginning such sales fairly soon; they noted that, given the evident demand in the market for safe, longer-term assets, modest sales of MBS might not put much, if any, upward pressure on long- term interest rates or be disruptive to the functioning of financial markets. However, many participants still saw asset sales as potentially tightening financial conditions to some extent. Most participants continued to judge it appropriate to defer asset sales for some time; several noted the modest weakening in the economic outlook since the Committee's last meeting as an additional reason to do so. A majority of participants continued to anticipate that asset sales would start after the Committee had begun to firm policy by increasing short-term interest rates; such an approach would postpone asset sales until the economic recovery was well established and maintain short-term interest rates as the Committee's key monetary policy tool. A few participants suggested selling MBS and using the proceeds to purchase Treasury securities of comparable duration, arguing that doing so would hasten the move toward a Treasury-securities-only portfolio without tightening financial conditions. Participants agreed that it would be important to maintain flexibility regarding the appropriate timing and pace of asset sales, given the uncertainties associated with the unprecedented size and composition of the Federal Reserve's balance sheet and its effects on financial conditions. Overall, participants emphasized that any decision to engage in asset sales would need to be communicated well in advance of the initiation of such transactions, and that sales should be conducted at a gradual pace and potentially be adjusted in response to developments in economic and financial conditions.
It's pretty clear from the minutes that this is a great time of uncertainty even for the most brilliant of economists. While there is some consensus that we're in a weak recovery, FOMC members appear uncertain about how the details of their monetary policy actions should evolve going forward.
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