(US) MINUTES OF THE AUGUST FOMC MEETING: MORE STIMULUS (QUANTITATIVE EASING) COULD BE JUSTIFIED IN THE SHORT TERM IF THERE IS NO PICK UP IN THE ECONOMY;
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.
A number of them indicated that additional accommodation could help foster a more rapid improvement in labor market conditions in an environment in which price pressures were likely to be subdued. Many members judged that additional monetary accommodation (quatitative easing) 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.
OTHER EASING OPTIONS: Some participants commented on other possible tools for adding policy accommodation, including a reduction in the interest rate paid on required and excess reserve balances.
INFLATION: The incoming information on inflation over the intermeeting period was largely in line with participants’ expectations. Consumer prices had decelerated as a result of the pass-through of lower crude oil costs to retail prices of gasoline and fuel oil. Crude oil prices had turned up again more recently, but one participant noted that global inventories of oil were elevated and, with world demand easing, prices should be restrained going forward.
EMPLOYMENT: The information received over the intermeeting period indicated that economic activity had decelerated in recent months, with a notable slowing in consumer spending. Employment gains continued to be modest, and the unemployment rate was unchanged at a level that almost all members saw as elevated relative to levels consistent with the Committee’s mandate.
ECONOMY: Regarding the business sector, many participants reported that, with the exception of motor vehicle production, manufacturing activity in their Districts was slow or had declined in recent months.
CONCLUSION: Because most saw no significant changes in the medium-run outlook, they agreed to continue to indicate that the Committee anticipates a very gradual pickup in economic activity over time and a slow decline in unemployment, with inflation at or below the rate that it judges most consistent with its dual mandate. Consistent with the concerns expressed by many members about the slow pace of the economic recovery, the downside risks to economic growth, and the considerable slack in resource utilization, the Committee decided that the statement should conclude by indicating that it will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.
How to interpret this release?
To be absolutely honest, I find the Minutes to be inline with the FOMC Statement, but apparently the market thought otherwise and decided to focus on the potential of QE instead. I really don’t see a big deal with today’s release as the Committe made it plenty clear that it has a plan to launch further QE pending economic conditions, but I guess the market lost sight of that after the stellar NFP and Retail Sales release we got earlier this month… Moving forward, I still believe that QE3 is not a done deal, especially when you consider the term “a substantial and stable strengthening in the pace of economic recovery”, which in my opinion, is exactly the case right now, and with the next NFP release scheduled on September 7, I believe the Feds will end up delaying QE3 if we get another above 150K figure!
Of course, this week being the famous Jackson Hole week, Bernanke could make an announcement for QE3, and with the Minutes coming in at this crucial junction, it is understandable why the market reacted the way it did… At the end of the day, although I don’t believe QE3 is coming, the overall market trend still supports risk appetite, or a weaker USD, which has been my primary direction for weeks… As a matter of fact, I have been LONG on EURUSD since the 1.2240, and I’m targeting at least 1.2650…
FOMC Minutes: Quantitative Easing Justified In The Short Term…
August 22, 2012 by 11 Comments