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FOMC Minutes

January 07, 2010 | "Barron’s Econoday"

The minutes for the December 15-16 FOMC meeting showed a number of areas of debate internally within the Fed even though the latest policy vote was unanimous. The Fed governors and District presidents were split on whether inflation risk was on the upside or downside, although they agreed that underlying inflation currently is subdued. Interest rates remain on hold for some time although debate is heating up over what to do with the sharply expanded balance sheet. There was a modest upgrade on the overall economy in terms of downside risks were seen as "diminished a bit further."

"In their discussion of the economic situation and outlook, meeting participants agreed that the incoming data and information received from business contacts suggested that economic growth was strengthening in the fourth quarter, that firms were reducing payrolls at a less rapid pace, and that downside risks to the outlook for economic growth had diminished a bit further."

However, they also noted that while layoffs were slowing, few firms were actually hiring. One positive, however, was a pickup in the hiring of temp workers.

In terms of use of the Fed's balance sheet for policy, there was some debate over whether current plans need to be adjusted.

"A few members noted that resource slack was expected to diminish only slowly and observed that it might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the Committee's large-scale asset purchases and continuing them beyond the first quarter, especially if the outlook for economic growth were to weaken or if mortgage market functioning were to deteriorate. One member thought that the improvement in financial market conditions and the economic outlook suggested that the quantity of planned asset purchases could be scaled back, and that it might become appropriate to begin reducing the Federal Reserve's holdings of longer-term assets if the recovery gains strength over time."

Fed staff economists noted continuing difficulties in credit markets, including further declines in household debt, additional decreases in commercial bank credit, and reductions in commercial paper outstanding. In contrast, gross issuance of investment- and speculative-grade bonds was robust in November.

Staff economists raised their forecast for real GDP growth but recovery is still expected to be very sluggish.

"In the forecast prepared for the December FOMC meeting, the staff raised its projection for average real GDP growth in the second half of 2009 somewhat, and it also modestly increased its forecast for economic growth in 2010 and 2011."

"The staff again anticipated that the recovery would strengthen in 2010 and 2011, supported by further improvement in financial conditions and household balance sheets, continued recovery in the housing sector, growing household and business confidence, and accommodative monetary policy, even as the impetus to real activity from fiscal policy diminished. However, the projected pace of real output growth in 2010 and 2011 was expected to exceed that of potential output by only enough to produce a very gradual reduction in economic slack."
"The staff forecast for inflation was nearly unchanged. The staff interpreted the increases in prices of energy and nonmarket services that recently boosted consumer price inflation as largely transitory."

Overall, there were no significant surprises unless one was not aware that the Fed typically engages in significant internal debate over the direction and timing of policy changes during FOMC meetings. The difference between recent and past debates is its current complexity-meaning more debate is a good thing.

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