The debate within the Fed about potential additional policy actions has heated up according to the latest FOMC minutes. Many participants said more accommodation is needed unless there is substantial improvement in the economy. But participants also indicated that discussion of the costs and benefits of additional quantitative easing was useful. Some questioned the efficacy of a QE3. Many participants supported extending guidance but to wait for the September meeting for a decision.
The Board economists' assessment of the economy was not positive and could be interpreted as favorable toward further easing. However, economic news has improved since the FOMC meeting.
"The information reviewed at the July 31-August 1 meeting indicated that economic activity increased at a slower pace in the second quarter than earlier in the year and that labor market conditions had improved little in recent months."
"Manufacturing production decelerated significantly in the second quarter following a large gain in the first quarter, while the rate of manufacturing capacity utilization was unchanged on balance."
The staff did note improvement in housing but downplayed it somewhat.
"Conditions in the housing market generally improved further in recent months, but activity remained at a low level against the backdrop of the large inventory of foreclosed and distressed properties and tight underwriting standards for mortgage loans. Both starts and permits of new single-family homes increased in the second quarter."
The minutes portrayed inflation as under control despite pending higher food prices-suggesting that any boost in food price inflation is temporary. Such language gives the Fed room for additionally easing if they choose to do so.
"Overall U.S. consumer prices increased at a slower pace in the second quarter than in the first. Consumer energy prices declined significantly last quarter, and survey data indicated that gasoline prices fell somewhat further in the first few weeks of July. Meanwhile, consumer food prices posted only a small increase last quarter, but the recent sizable run-up in spot and futures prices of farm commodities, reflecting the effects of the drought and hot weather in the midwestern part of the United States, pointed to some temporary upward pressures on retail food prices later this year."
Of course, no commentary on recent economic conditions would be complete without mention of problems in Europe. These are seen as headwinds to global economic growth.
"Foreign economic growth continued to be subdued, as fiscal retrenchment and financial stresses in the euro area continued to weigh on economic activity in Europe and elsewhere."
The staff nudged down its near-term forecast for the U.S. economy but kept its medium-term forecast little changed-meaning the recovery is expected to gradually improve. The unemployment rate is expected to come down but slowly.
There appears to be notable disagreement within the Fed regarding QE3-although language suggests more are leaning toward QE3 than opposed if conditions warrant.
"Participants also exchanged views on the likely benefits and costs of a new large-scale asset purchase program. Many participants expected that such a program could provide additional support for the economic recovery both by putting downward pressure on longer-term interest rates and by contributing to easier financial conditions more broadly. In addition, some participants noted that a new program might boost business and consumer confidence and reinforce the Committee's commitment to making sustained progress toward its mandated objectives. Participants also discussed the merits of purchases of Treasury securities relative to agency MBS. However, others questioned the possible efficacy of such a program under present circumstances, and a couple suggested that the effects on economic activity might be transitory."
"Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery. Several members noted the benefits of accumulating further information that could help clarify the contours of the outlook for economic activity and inflation as well as the need for further policy action. One member judged that additional accommodation would likely not be effective in improving the economic outlook and viewed the potential costs associated with such action as unacceptably high. At the conclusion of the discussion, members agreed that they would closely monitor economic and financial developments and carefully weigh the potential benefits and costs of various tools in assessing whether additional policy action would be warranted."
The bottom line is that the Fed is still debating additional policy measures while watching economic news on the health of the recovery. If there is to be additional easing, a key phrase from the minutes could turn out to be "fairly soon" regarding new moves if lack of economic improvement. This might mean September but it also could mean December-with the latter more likely in order to avoid partisan appearances before the presidential election.