FOMC Minutes Review: Slightly More Hawkish On Growth

In the minutes of the January FOMC meeting, the Fed showed slightly more hawkish tone on the economic outlook. It revised up its forecast on 2010 GDP growth to 2.8%-3.5% from 2.5% to 3.5% projected in November. However, the Committee also lifted unemployment rate to 9.5%-9.7% in 2010 from previous estimates of 9.3%-9.7%. Forecasts for 2011 were largely unchanged.

Concerning economic outlook, the Fed stated that 'economic growth had strengthened 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'. In the job market, 'the rise in employment of temporary workers in recent months appeared to be continuing; historical experience suggested that increased use of temporary help could presage a broader increase in job growth'. Also, 'if the unusually rapid productivity growth seen in recent quarters was not sustained, then job growth could pick up significantly as productivity returned to sustainable levels'.

Policymakers sounded less pessimistic about disinflation though views on inflation outlook remained mixed. Concerning economic slack, it's pointed out in the minutes that several members observed that 'the necessity of reallocating labor across sectors as the recovery proceeds, as well as the loss of skills caused by high levels of long-term unemployment and permanent separations, could reduce the economy's potential output.

Exit strategies mentioned in the minutes were similar to what the Fed Chairman Ben Bernanke testified last week. Interest on Excess Reserves (IOER) will be the main tool for raising interest rates. 'All agreed that raising the IOER rate and the target for the federal funds rate would be a key element of a move to less accommodative monetary policy'.

In order to adjust the Fed's balance and its composition, the Fed may sell Treasuries. Policymakers were unanimous in the view that it would 'eventually be appropriate for the System Open Market

Account to return to holding only securities issued by the U.S. Treasury, as it did before the financial crisis'. However, it's uncertain whether it would sell MBS holdings as 'participants agreed that a policy of redeeming and not replacing agency debt and MBS as those securities mature or are prepaid would contribute to achieving both goals and thus would be appropriate'.