FOMC Minutes Show Disagreement Over QE2 and Revised Growth Predictions

Yesterday, the minutes from the U.S. Federal Reserve’s Federal Open Market Committee’s meeting earlier this month were released to the general public.

The minutes showed disagreements between bank governors on the “Quantitative Easing 2” program and a sharply downward revision of growth forecasts, both of which were expected.

The GDP for 2010 is now seen at 2.4-2.5%, versus 3-3.5% in June.

For 2011, GDP is expected between 3% and 3.6%, down from 3.5% to 4.2% previously. The 2012 GDP projection is little changed while the new 2013 projection is put at 3.5-to-4.6%.

The FOMC governors clearly did not expect another recession to occur.

As a consequence of the downgrading of growth outlook, expectations for the unemployment rate were raised. For 2011, a jobless rate of 8.9% to 9.1% is expected (little progress from today’s 9.6%). Even in 2013, the jobless rate is still seen between 6.9% and 7.4% that suggests that monetary policy will remain very accommodative in a longer term perspective.

Regarding inflation, unsurprisingly the Fed governors continue to project very low inflation, but interestingly, the projections were very slightly revised higher despite the increased fears of inflation that flared up in late summer. Core PCE inflation is seen between 1% and 1.1% in 2010 (up from 0.8% to 1% in June) and between 0.9% and 1.6% in 2011 (previously 0.9% to 1.3%).

The FOMC minutes extensively went into the discussion about QE2, on which there was some disagreement between participants, but given that these have already been aired in speeches, we won’t elaborate on them.

Interestingly, the Federal Open Market Committee minutes stressed the need for increased appropriate communication of the policy towards the population and markets, while the Fed governors also debated potential benefits and costs of setting a target for term interest rates. The latter, if implemented would of course be a big step for the central bank. It would be risky for the Fed’s balance sheet, but may convince investors that future inflation will be higher. We didn’t see the targeting of a price level being discussed, but the setting of an explicit inflation target was talked about.

Content provided by: KBC Bank