U.S. Federal Reserve Minutes: More Support Warranted Unless Data Turns
The minutes highlight the diverging degrees of concern among policymakers about the run of disappointing economic reports during the spring and early summer. While the weakening resulted in several members indicating that they had lowered their near-term expectations for growth, most did not change their forecasts for the economy's performance in the medium term. Uncertainty about developments on the domestic fiscal front and concerns about conditions in the euro area were attributed with holding back both household and business spending. The Committee viewed the slow pace of growth as creating vulnerabilities to the US economy should an adverse shock materialize.
The minutes show that some members thought that a further easing in policy should be enacted "fairly soon" and provided a detailed discussion of which tools were viewed as best serving to mitigate the weakening in the pace of economic activity. The decision to maintain the status quo on August 1, 2012 was based on the assessment of some members that there were benefits to waiting for more data in order to judge the "contours" of the expansion and inflation outlook. Many members said that additional policy support "would likely be warranted" unless the economic data "pointed to a substantial and sustainable strengthening in the pace of economic recovery." One member argued that additional policy easing "would not be effective" in boosting growth and said that the risks around doing so were "unacceptably high." The Committee had a detailed discussion of the risks associated with employing a variety of easing options. The policy options discussed included: extending the projected time period for which monetary policy is expected to remain highly stimuative, engaging in more large-scale asset purchases, and a reduction in the interest rate paid on reserves. Mention was made of the European Central Bank’s (ECB) recent cut to its discount rate and the Bank of England's Funding for Lending Scheme.
Data released since this meeting include the July labour report, which was firmer than expected, and reports on retail sales and industrial production that showed renewed vigour. The reports suggest that the rationale for holding off on implementing additional easing measures remain intact heading into the next policy meeting on September 12, 2012. Importantly, the August labour report will be released prior to this meeting, and given the decline in the trend level of claims (four-week average at lowest since April 2008 in week ended August 11), we expect that it will provide further evidence of accelerating job growth. Although the spring slowing in economic activity looks to have run its course, the ongoing European crisis, and domestic fiscal and political concerns will keep the debate about whether more stimulus is in the pipeline alive.
Fed Chairman Bernanke will deliver a speech at Jackson Hole on August 31, 2012 and is expected to provide his take on the near-term outlook. Financial markets will be watching for suggestions that the Chairman views more policy stimulus will be needed to ensure the unemployment rate is on track to meet the Fed's estimate of full-employment for the medium term or, conversely, that the recent snapback in activity is sufficient to confirm "a substantial and sustainable strengthening in the pace of economic recovery" is underway.