The latest FOMC minutes indicate that the Fed is squarely in the middle of a debate about the direction of the economy. Importantly, most FOMC participants noted improved economic data but still saw GDP risks to the downside. Most saw inflation risks as balanced. There was a wide range of views about where policy should head. Some were open to expanding the balance sheet (i.e., QE3) while others proposed dropping or simplifying forward guidance. The Fed's staff economists see a gradual acceleration in GDP growth with the unemployment rate remaining high at the end of 2013.
Of course, the biggest announcement from the January FOMC was that the Fed anticipates that the fed funds rate is likely to be exceptionally low through late 2014. This is old news now.
There was some more detail about the decision to focus more on a long-term inflation goal. The Fed now has a long-term "goal" of 2 percent PCE inflation. This is as close as the Fed can get to an explicit inflation target, given that there still is a dual mandate for low inflation AND healthy employment growth. That is, the Fed cannot make pronouncements (targets) that ignore legislative mandates. But for all practical purposes, the Fed is now inflation targeting with the belief that low inflation best encourages employment growth.
"The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances."
While FOMC participants see improvement in the U.S. economy ahead, there were concerns. Essentially, the Fed prefers to be safe than sorry about providing adequate monetary stimulus.
"A number of factors were seen as likely to restrain the pace of economic expansion, including the slowdown in economic activity abroad, fiscal tightening in the United States, the weak housing market, further household deleveraging, high levels of uncertainty among households and businesses, and the possibility of increased volatility in financial markets until the fiscal and banking issues in the euro area are more fully addressed. Participants continued to expect these headwinds to ease over time and so anticipated that the recovery would gradually gain strength. However, participants agreed that strains in global financial markets continued to pose significant downside risks to the economic outlook."
There was disagreement over the likelihood of QE3. Some participants were receptive to the possibility while one member strongly suggested that tightening is more likely than further easing.
"A few members observed that, in their judgment, current and prospective economic conditions--including elevated unemployment and inflation at or below the Committee's objective--could warrant the initiation of additional securities purchases before long. Other members indicated that such policy action could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run. In contrast, one member judged that maintaining the current degree of policy accommodation beyond the near term would likely be inappropriate; that member anticipated that a preemptive tightening of monetary policy would be necessary before the end of 2014 to keep inflation close to 2 percent."
The QE debate likely was nothing more than that-a debate. Given that the Fed considers the costs and benefits of policy changes, more likely than not the benefits of QE3 are extremely small with costs likely higher.
And for entertainment/trivia purposes, there was some annual, first of the year business that the FOMC conducted. The Fed actually votes on where open market operations take place each year. It may or may not be a surprise but the FOMC by unanimous vote chose the Federal Reserve Bank of New York to execute transactions for the System Open Market Account. Theoretically, the Fed could vote to have open market operations in Dallas or Richmond or any other Fed city but that is not likely.
The official voting members of the FOMC were sworn into office. These include all Federal Reserve Board members plus five District bank presidents. As always, the New York Fed president is on this panel and currently is William Dudley. The other four District bank presidents with voting rights this year are Jeffrey Lacker, Richmond; Sandra Pianalto, Cleveland; Dennis Lockhart, Atlanta; and John Williams, San Francisco.
More trivia-what currencies did the Fed authorize to purchase or sell? This is a first of the year vote.
Authorized currencies are: Australian dollars, Brazilian real, Canadian dollars, Danish kroner, euro, Japanese yen, Korean won, Mexican pesos, New Zealand dollars, Norwegian kroner, Pounds sterling, Singapore dollars, Swedish kronor, and Swiss francs.
Overall, the Fed is being cautious to provide as much monetary stimulus as possible given risks from abroad and likely fiscal contractionary policy in coming quarters.