Minutes from the latest meeting of the Federal Reserve’s policymaking committee, released on Tuesday, revealed a deep divide among members about how to move forward.
Participants in the Federal Open Market Committee’s Aug. 9 meeting said that economic conditions were weaker than anticipated. The FOMC "notably" marked down its GDP growth projections for the rest of 2011 and 2012.
Some participants thought the decision to hold interest rates at rock-bottom levels through mid-2013 didn’t go far enough and “a more substantial move” was warranted. They supported stronger forward guidance as a step in the right direction towards additional monetary accommodation. The minutes revealed that use of another round of asset purchases, or QE3, was discussed.
A couple members said the high level of long-term unemployment could permanently harm employment prospects for those affected; another said that it might instead reflect a mismatch between the jobs available and the skills of the unemployed. Most participants expect inflation to decline somewhat over time, but some noted that core inflation had risen, on balance, since last fall.
Some said the rise of inflation reflected the Fed’s accommodative policy. Others suggested that the juxtaposition of higher core inflation and lower unemployment may imply that potential output was lower than previously recognized.
Three members dissented from the Fed’s decision to announce that economic conditions are likely to warrant holding interest rates low through mid-2013. Richard Fisher, Narayana Kocherlakota, and Charles Plosser would have preferred to say the Fed would keep rates low for an “extended period”—but for very different reasons.
Fisher said the U.S. economy’s fragility was chiefly a result of nonmonetary factors such as uncertainty and that the FOMC lacked the information to provide a specific time interval that would warrant accommodative policies. Such action could make the committee appear “overly responsive” to market volatility, he warned. Kocherlakota, on the other hand, said inflation had risen and unemployment dropped since the FOMC chose a level of accommodation in November 2010. Providing additional accommodation is not the appropriate response to those changes, he said. Plosser feared that by referring to a specific year, the Fed risked suggesting that monetary policy was no longer contingent upon the economic outlook.
Other policy actions under consideration were increasing the size of the Fed's balance sheet and reducing interest rates paid on excess reserve balances. Some warned that additional monetary accommodation could drive up inflation without increasing employment or output.
Participants were unanimous on one thing: monetary policy alone will not be a panacea to address the strains on the economy.
The FOMC’s next meeting will take place over the course of two days in late September, rather than the customary one, to allow for a fuller discussion of the costs and benefits of employing different policy tools.