It's the $500 billion question: will the Federal Reserve's Open Market Committee order another round of quantitative easing ("QE2") when it meets in November? The detailed minutes were released today from the FOMC's September 21st meeting. Ever since its brief statement was released last month, the market has been speculating that QE2 is imminent, with many people arguing that the Fed showed its hand by expressing its readiness to act. But the minutes provide additional uncertainty on whether we'll see more monetary expansion in November.
One reason why it seemed more plausible that the Fed would expand monetary policy was that it expressed new concern over the price level. If inflation is lower than its target, then additional money supply could help to raise it. Yet, the minutes say that inflation hasn't declined much in recent months. Moreover, committee members hadn't changed their inflation expectations significantly in September. The minutes say:
Although prices of some commodities and imported goods had risen recently, many business contacts reported that they currently had little pricing power and that they anticipated limited, if any, increases in labor costs. Meeting participants noted that several measures of inflation expectations had changed little, on net, over the intermeeting period and that analysis of the components of price indexes suggested disinflation might be abating. However, TIPS-based inflation compensation had declined, on balance, in recent quarters. While underlying inflation remained subdued, participants saw only small odds of deflation.
In other words, there's only mild concern about the piece level. Without much fear of deflation, the basis for QE2 must rely almost entirely on the Fed's mandate to encourage full employment.