The Fed dance continued yesterday with the release of the minutes. In most ways, the content of the minutes was largely expected, as reported by Free Exchange. Forecasts for growth and inflation were knocked down, while the forecast for unemployment was edged up. Overall, the Fed concluded that:
The economic outlook had softened somewhat and a number of members saw the risks to the outlook as having shifted to the downside. Nonetheless, all saw the economic expansion as likely to be strong enough to continue raising resource utilization, albeit more slowly than they had previously anticipated. In addition, they saw inflation as likely to stabilize near recent low readings in coming quarters and then gradually rise toward more desirable levels. In sum, the changes to the outlook were viewed as relatively modest and as not warranting policy accommodation beyond that already in place.
They did inject some uncertainty over the path of policy:
However, members noted that in addition to continuing to develop and test instruments to exit from the period of unusually accommodative monetary policy, the Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably
Still, the minutes read as if additional policy stimulus is a remote chance. As has been reported, recent Fedspeak has been decidedly more mixed.
Paul Krugman bemoans the fact that the Fed understands and is largely comfortable with meeting neither of its dual objectives. The minutes are quite clear on this point:
A number of participants expressed the view that, over the next several years, both employment and inflation would likely be below levels they consider to be consistent with their dual mandate, but they anticipated that, with appropriate monetary policy, both would rise over time to levels consistent with the Federal Reserve’s objectives.
I guess you are not all that worried about high unemployment for “several years” when you have a 13 year appointment. Two additional gems in the minutes:
Participants also noted that several uncertainties, including those related to legislative changes and to developments in global financial markets, were generating a heightened level of caution that could lead some firms to delay hiring and planned investment outlays.
Reportedly, employers were still cautious about adding to payrolls, given uncertainties about the outlook for the economy and government policies.
These two lines imply that some Fed members are buying the story that the lack of business confidence is due to all the uncertainty created by the Obama Administration. Convenient excuse to avoid additional stimulus. Nothing we can do, this is a problem caused by those silly fiscal policymakers.
And another point I find odd:
Participants also noted a risk that continued rapid growth in productivity, though clearly beneficial in the longer term, could in the near term act to moderate growth in the demand for labor and thus slow the pace at which the unemployment rate normalizes.
Rapid productivity growth should never be a problem. It is only a problem if policymakers hold demand unnecessarily low such that the additional potential output cannot be absorbed. Answer: Do more to stimulate demand.
Bottom Line: The minutes paint a picture of monetary policymakers slightly more concerned about an already questionable outlook, but not concerned enough to do anything about it. This stance appears a bit more vulnerable in light of flow of data since the last FOMC meeting, and that flow of data may be exactly what recently pushed some Fed officials to emphasize the “we can do more” story. In effect, a preemptive effort to alleviate the seemingly hawkish stance of the minutes. Hopefully, Federal Reserve Chairman Ben Bernanke will provide additional clarity of the Fed’s stance with regard to additional easing at next week’s semi-annual testimony.