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U.S. Federal Reserve Minutes: December 15-16 FOMC meeting
January 7, 2009
Highlights of Minutes:
- The December 15-16 FOMC meeting concluded with the Fed announcing an unexpectedly aggressive cut in Fed funds to a range of 0% to 0.25% from the 1.00% that prevailed going into the meeting. A relatively bleak description of the economy prompted the central bank to comment that economic conditions warrant that these low interest rates. With interest rates essentially at zero, the statement indicated that future stimulative actions will likely rely more on “open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at high levels.”
- The minutes revealed that all meeting participants felt “that the economic downturn had intensified over the fall.” Though there had been some instances where the pressures in financial markets eased “conditions generally remained very strained.” The restraint to the economy was operating both through tighter credit conditions for both households and businesses and downward pressure on household net worth. Growth was expected to be particularly weak in the fourth quarter of 2008 and was “expected to fall much more sharply over the first half of 2009 than previously anticipated.” Recovery was expected to occur over the second half of 2009 as the various policy measures, both monetary and ‘assumed’ fiscal, “gained traction and the turmoil in financial system began to recede.”
- Inflation was expected to continue to moderate. In fact, some member expressed the concern that “inflation could decline and persist for a time at uncomfortably low levels.”
- The minutes indicated that there was some discussion about not announcing any target for Fed funds. However, there was concern that the absence of a target might give the impression that the central bank was unable “to control the federal funds rate.” Thus the target range was agreed to with the proviso that it be stressed that these low interest rates may need to be maintained “for some time.”
- The minutes indicate quite a lengthy discussion about using the Federal Reserve’s balance sheet to provide additional liquidity to the economy. Within this context, the issue emerged as to whether there might be some advantage to “setting quantitative targets for bank reserves or the monetary base.” However, one objection to do so was that it might provide misleading information to financial markets. For example, “a decline in excess reserves or the monetary base [and thus potential movement away from a specified target] would not necessarily be contractionary if it occurred in the context of improving financial market conditions.”
- There was some discussion about the course of policy once the economy was on a recovery track. This would necessitate that the size of the balance sheet and monetary base would need to be reduced. As well, the “policy framework would return to focus on the level of federal funds rate.”
In summary, the minutes make clear the central bank’s concern about the state of the economy. These concerns obviously prompted the aggressive cut in interest rates to a range bordering on 0%. However, the minutes make clear that this does not imply that the central bank can do nothing more to add further stimulus to the system. The minutes reiterate the point that the Federal Reserve will, and in fact already has, undertaken purchases of large quantities of agency debt and mortgage-backed securities. Even with these aggressive, exceptional actions, the central bank concluded that “the economic outlook would remain weak for some time and the down side risks to economic activity would be substantial.”
Paul Ferley, Assistant Chief Economist, RBC Economics Research
To view charts of today's data, go to
http://www.rbc.com/economics/html_calendars/ca/calendar.html (Canada)
http://www.rbc.com/economics/html_calendars/us/calendar.html (United States)
RBC Economics Research contacts:
Paul Ferley, Assistant Chief Economist
Dawn Desjardins, Assistant Chief Economist
Josh Heller, Economist
Go to Financial Markets Daily (pdf) for a daily summary of North American interest rates and foreign exchange rates.
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