Minutes of March 17-18 FOMC Indicate the Move to Quantitative Easing Prompted by Worsening Economic Outlook

Highlights of Minutes:

The hallmark of the March 17-18 FOMC meeting was that it saw the Fed initiate a program of quantitative easing with the announcement "to purchase up to $300 billion of longer-term Treasury securities over the next six months." Today’s minutes provided the rationale for the move though there was little hint as to whether this policy initiative would continue to be pursued.

The move to quantitative easing was in large part prompted by growing downside risks to growth from already weak levels. These additional downside risks emerged due to "potential adverse feedback effects as reduced employment and production weighed on consumer spending and investment." This was viewed as having the potential knock-on effect of boosting "losses of financial institutions, leading to a further tightening of credit conditions."

With respect to inflation, the minutes revealed that all participants felt that pressures would remain subdued though several members saw inflation would likely persist lower than expected. Thus risks to both growth and inflation were pointing to the need for further easing.

With interest rates already abutting 0%, the FOMC members "agreed that substantial additional purchases of longer-term assets eligible for open market operations would be appropriate." The issue was which assets should see increased purchases. Today’s minutes revealed a single member felt that additional purchases should focus on long-term Treasuries while another member argued in favour of a bias towards agency mortgage-backed securities (MBS). A compromise was struck by opting for increased purchases of a broad range of assets including both Treasuries and MBS. The FOMC eventually announced a $750B increase in MBS purchases, introduced $300B for the purchase of Treasuries and $100B in other agency debt. The minutes indicated that the various members were willing to agree to this broad array given that "the effects of any one tactic were uncertain.

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