A Few Doves Favored More Easing Than Just A Guideline On Fed Funds Rate

The minutes of the August FOMC meeting unveiled that a few members believed the Fed should have done more at the meeting, given the economic developments. The range of tools that policymakers discussed to stimulate the economy included reinforcing forward guidance about the likely path of monetary policy, additional asset purchases, increasing the average maturity of securities holdings, reducing the interest rate paid on excess reserve balances. However, the preference of the above tools was not shown. Information received during the intermeeting period had led the staff to revise down the projection for real GDP growth in the second half of 2011 and in 2012 'notably'. Concerning inflation, policymakers believed headline inflation has 'moderated' as 'prices of energy and some commodities have declined from their earlier peaks'.

As the minutes stated, 'a few members' preferred 'a more substantial move at this meeting'. Some members favored additional easing as they expected 'the unemployment rate to remain well above, and inflation to be at or below, levels consistent with the Committee's mandate. However, they were willing to accept 'the stronger forward guidance as a step in the direction of additional accommodation' as this was 'a measured response to the deterioration in the outlook over the intermeeting period'. In choosing the time horizon of 'at least through mid-2013', members also considered 'conditioning the outlook' for the Fed funds rate on 'explicit numerical values for the unemployment rate or the inflation rate'. While some members said that stating an explicit time horizon would 'establish greater clarity regarding the Fed's intentions and its likely reaction to future economic developments', others questioned about 'how an appropriate numerical value might be chosen'.

Policymakers did not show preference on the stimulating tools but they 'agreed that the September meeting should be extended to two days' as more time is needed for discussion. Among the tools, we believe lengthening the duration of securities holdings would be preferable currently as it would lower longer term interest rates without needing to boost the size of the Fed's balance sheet.

As far as the economic outlook is concerned, most members downgraded their forecasts after taking information during the intermeeting period into account. In particular, the lower estimates of real GDP in recent years that were contained in the annual revisions to the NIPA led the staff to lower its estimate of potential GDP growth, both during recent years and over the forecast period, and to mark down further the staff forecast. Moreover, a 'couple of participants' worried that the 'exceptionally high level of long-term unemployment' could lead to 'permanent negative effects on the skills and employment prospects of those affected'. Concerning inflation, the members 'continued to expect prices to rise at a subdued pace in 2012'.