FED’s November Minutes

Ben and Co. downgraded their assessment of the economy as they debated the benefits and costs of a new bold step to support the recovery. They expect the economy to grow at a moderate pace next year, with unemployment staying disappointingly high and inflation uncomfortably low. GDP is projected to rise between +3.0% and +3.6% after growing by around +2.5% this year. In June they forecast between +3.5% and 4.2% next year. Since the recession ended in June 2009, the economy has been expanding at an average quarterly rate of less than +3.0%. This is an uncomfortable low level to ‘make a dent on unemployment’. ‘Participants agreed that progress in reducing unemployment was disappointing’, further softness could lead to a higher unemployment rate. They anticipate that the slow recovery should keep the unemployment rate (+9.6%) around +9.0% at the end of 2011. Interestingly, last June, they had forecast the jobless rate would be around +8.5% in the last three months of 2011. The upper range of the longer-run jobless rate was increased to 6.0% from 5.3%, indicating Fed officials believe the recession has caused some permanent damage to the labor market. They expect that a weaker US economy keep inflation below the Fed’s ‘informal’ target of just under +2.0% well into 2013. Benign inflation and high unemployment supported officials to resume a bond purchase program that was used to combat the financial crisis. Despite a 10-1 majority to support the move, several worried about its consequences. ‘Some participants noted concerns that additional expansion of the Federal Reserve’s balance sheet could put unwanted downward pressure on the dollar’s value in foreign exchange markets’. Several officials saw a risk the move could ‘cause an undesirably large increase in inflation’. Of interest, the Fed’s held a conference two weeks before their formal November 2-3 meeting to discuss whether to set targets for inflation or long-term interest rates. Should the Fed target an interest rate that is longer in duration than fed funds, which is now just a little bit above zero? Some policy makers argued that targeting the yield on a term security could be an effective way to reduce longer-term interest rates and thus provide additional stimulus to the economy, the minutes of the meeting said. However, they also worried that targeting a longer-term interest rate could force the Fed to buy undesirably large amounts of bonds to keep the interest rate at the target. Something for the market to think about if the economy continues to weaken.

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