FOMC: No Discussion of Exit Strategies

• The minutes of the FOMC meeting on April 28-29 confirm that committee members remain focused on improving financial market conditions and combating deflation risks. They contained almost no discussion on possible exit strategies.
• While several members mentioned scaling up asset purchases, the committee chose to adopt a wait-and-see position for now. We expect improved economic indicators in coming months to effectively remove further quantitative easing from the table.
• Earlier today Treasury Secretary Geithner testified before the Banking Committee, stating that the toxic assets purchase program (PPIP) will begin acquiring assets within the next six weeks.

Details: Generally, there were few surprises in the FOMC minutes. On growth, they revealed that members have become somewhat more optimistic, reflecting the message contained in the statement. Nevertheless, formal GDP growth projections were revised down, probably due to a larger than expected decline in Q1 growth. Inflation appears the least of the committee’s worries with updated projections showing members expecting it to fall below the longer-run "target" level even based on a three year horizon.

This also explains why the minutes do not include any discussion of exit strategies amongst members. However, some referred to potential pitfalls of "making inflation projections based on contemporaneously available measures of resource slack during periods when the economy is facing large supply shocks and significant sector reallocation". In other words, using a traditional output or NAIRU gap to gauge inflation pressure may not now be the best measure.

The possibility of scaling up the asset purchase programme was also discussed with some members stating that "further increases could be warranted to spur a more rapid recovery". However, all agreed to adopt a wait-and-see approach for now. Still, we expect improved economic indicators in coming months to remove the possibility of such an increase. In other words, the meeting on June 23-24 could well prove to be the final opening.

Danske Bank
http://www.danskebank.com/danskeresearch

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