Minutes from the Fed’s September meeting came out at 2 PM EST today.
They cover the Federal Open Market Committee’s September 20-21 meeting, after which it announced Operation Twist.
Big news is that some members favored more quantitative easing, even if it expanded the Fed’s balance sheet. Two members were particularly vehement about this, though acquiesced to just Operation Twist as it didn’t rule out stronger measures in the future.
Three different alternatives were considered at the meeting: a reinvestment maturity extension program, a SOMA portfolio maturity extension program, and a large-scale asset purchase program. Members saw the limited impact of some of these programs as a big drawback. The debate over typical QE centered around its impact on effectiveness and inflation. Members also considered reducing the IOR rate, but ultimately decided to wait on more information about what exactly that would do as a policy decision.
FOMC had a poor outlook on the state of the economy, and was — on the whole — concerned more about signs that growth was slowing down than about inflation. The staff lowered its GDP projections for the second half of 2011 as well as the medium-term.
We were looking for three big things from the minutes:
- Tools the Fed still has in its pocket to stimulate the recovery or stop a recession. These could come in handy if “the economy is close to faltering” like Chairman Ben Bernanke thinks.
- Though Bernanke said last week, “There are no immediate plans for QE3,” investors are not convinced. We’ll see if QE3 was brought up in September and if any members were fighting for it in the near-term.
- As in August, three committee members dissented from the policy decision in September. We’ll be looking to see how much power Bernanke has to pass the monetary policies he supports.
A full analysis of our expectations can be found here. Read the minutes for yourself below.
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PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
Elizabeth Duke
Charles L. Evans
Richard W. Fisher
Narayana Kocherlakota
Charles I. Plosser
Sarah Bloom Raskin
Daniel K. Tarullo
Janet L. Yellen
Christine Cumming, Jeffrey M. Lacker, Dennis P. Lockhart, Sandra Pianalto, and John C. Williams, Alternate Members of the Federal Open Market Committee
James Bullard and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis and Boston, respectively
Esther L. George, First Vice President, Federal Reserve Bank of Kansas City
William B. English, Secretary and Economist
Deborah J. Danker, Deputy Secretary
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
James A. Clouse, Thomas A. Connors, Steven B. Kamin, Loretta J. Mester, Simon Potter, David Reifschneider, Harvey Rosenblum, and David W. Wilcox, Associate Economists
Brian Sack, Manager, System Open Market Account
Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors
Patrick M. Parkinson, Director, Division of Banking Supervision and Regulation, Board of Governors
Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors
Robert deV. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors
William Nelson, Deputy Director, Division of Monetary Affairs, Board of Governors
Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors
Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director, Board of Governors
Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors; Michael P. Leahy, Senior Associate Director, Division of International Finance, Board of Governors; Lawrence Slifman and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors
Andrew T. Levin, Senior Adviser, Office of Board Members, Board of Governors; Stephen A. Meyer and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors
Daniel M. Covitz and David E. Lebow, Associate Directors, Division of Research and Statistics, Board of Governors
David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors
Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors
James M. Lyon, First Vice President, Federal Reserve Bank of Minneapolis
Jeff Fuhrer, Executive Vice President, Federal Reserve Bank of Boston
David Altig, Alan D. Barkema, Spencer Krane, Mark E. Schweitzer, Christopher J. Waller, and John A. Weinberg, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Kansas City, Chicago, Cleveland, St. Louis, and Richmond, respectively
Julie Ann Remache, Assistant Vice President, Federal Reserve Bank of New York
Eric T. Swanson, Senior Research Advisor, Federal Reserve Bank of San Francisco
Jonathan Heathcote, Senior Economist, Federal Reserve Bank of Minneapolis
Developments in Financial Markets and the Federal Reserve’s Balance Sheet
The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Federal Open Market Committee (FOMC) met on August 9, 2011. He also reported on System open market operations, including the continuing reinvestment into longer-term Treasury securities of principal payments received on SOMA holdings of agency debt and agency-guaranteed mortgage-backed securities (MBS). By unanimous vote, the Committee ratified the Desk’s domestic transactions over the intermeeting period.
Staff Presentation on Policy Tools
The staff gave a presentation on several tools that could be used, within the Committee’s current policy framework, to provide additional monetary policy accommodation to support the economic recovery. The presentation first reviewed three options for managing the size and composition of the SOMA portfolio: a reinvestment maturity extension program, a SOMA portfolio maturity extension program, and a large-scale asset purchase program. Under the first of these options, the Federal Reserve would reinvest the principal payments it receives on its holdings of agency securities exclusively in long-term Treasury securities. Under the second option, the Committee would purchase long-term Treasury securities and sell the same amount of shorter-term Treasury securities; these transactions would significantly increase the average maturity of the SOMA portfolio, but the size of the Federal Reserve’s balance sheet and the level of reserve balances would be largely unaffected in the near term. Under the third option, the Committee would purchase longer-term Treasury securities, increasing the size of its balance sheet and the supply of reserve balances. The staff also summarized a set of options for clarifying, for the public, the Committee’s longer-run objectives under its dual mandate as well as the Committee’s forward guidance about the likely future stance of monetary policy. The options focused on ways to elucidate the economic conditions that could warrant raising the level of short-term interest rates. Finally, the staff presentation summarized the potential implications of reducing the interest rate that the Federal Reserve pays on reserve balances that depository institutions hold in accounts at the Federal Reserve Banks (the IOR rate).
Meeting participants expressed a range of views on the potential efficacy of policy tools tied to the size and composition of the Federal Reserve’s balance sheet. Many judged that these policies could provide additional monetary policy accommodation by lowering longer-term interest rates and easing financial conditions at a time when further reductions in the federal funds rate are infeasible. However, a number saw the potential effects on real economic activity as limited or only transitory, particularly in the current environment of balance sheet deleveraging, credit constraints, and household and business uncertainty about the economic outlook. Participants noted that a SOMA maturity extension program would not expand the Federal Reserve’s balance sheet or the level of reserve balances, and that the scale of such a program was necessarily limited by the size of the Federal Reserve’s holdings of shorter-term securities so that it could not be repeated to provide further stimulus. A number of participants saw large-scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted. Some judged that large-scale asset purchases and the resulting expansion of the Federal Reserve’s balance sheet would be more likely to raise inflation and inflation expectations than to stimulate economic activity and argued that such tools should be reserved for circumstances in which the risk of deflation was elevated. In commenting on the implications of a maturity extension program or another large-scale asset purchase program, several participants noted that the System should avoid holding a very large proportion of the outstanding stock of longer-term Treasury securities in its portfolio because the result could be a deterioration in market functioning. A number of participants suggested directing some purchases or reinvestments into agency MBS; however, a couple of participants saw such actions as unlikely to have benefits, or as a form of credit allocation.
