Minutes of the Federal Reserve Board's January meeting confirm that current board governors are divided over more bond purchasing, but they also portray the central bank leaders as agreed on the propriety of ultra-low interest rates.
The document contained few surprises, reaffirming the U.S. central bank's commitment to highly accommodative benchmark rates and transparent communication.
In their current state of enhanced transparency, Chairman [Ben] Bernanke and his merry bank of policymakers are telling us they have our backs and are willing to do whatever it takes to help the economy, Scott Wren, senior equity strategist at Wells Fargo Advisors, said in a note sent to clients before the release of the minutes.
While that view is widely held by market participants, it seems not everyone inside the Fed believes another round of bond purchasing, commonly referred to as quantitative easing, qualifies as whatever it takes.
While the minutes noted a few members thought appropriate policy would include additional asset purchases in 2012, they also stated other members indicated that such policy action could become necessary if the economy lost momentum but not at the moment. One unnamed participant, presumably Richmond Fed President Jeffrey Lacker, assumed an early ending of the maturity extension program, the minutes said.
Regardless of their views on quantitative easing, it appeared most Fed board members were solidly behind keeping interest rates at ultra-low levels. The minutes noted members thought it would be appropriate to maintain the existing highly accommodative stance of monetary policy. In particular, they agreed to keep the target range for the federal funds rate at 0 to ¼ percent.
A Window Into Mariner Eccles
While the minutes did not reveal any shocking surprises, they did open a window into the way U.S. central bankers are thinking about the economy.
Expectations for inflation, unemployment and GDP growth in the near-future, as a trend, were slightly down from the expectations expressed in November. Everyone seemed to agree inflation was subdued, and that the housing market was still in shaky footing, the result of a large overhang of foreclosed and distressed properties, uncertainty about future home prices, and tight underwriting standards for mortgage loans.
The main philosophical clashes amongst Fed members seem to come from their understanding of what the slack in the labor utilization picture, the difference between the current unemployment rate and long-term goals, was at the moment.
Participants expressed a range of views on the current extent of slack in the labor market, the minutes stated, later adding in general, the dispersion of views on the outlook for inflation over the projection period represented differences in judgments regarding the degree of slack in resource utilization and the extent to which slack influences inflation and inflation expectations.
This fundamental disagreement in worldview between members also affected their individual understanding of unemployment, with some members suggesting that a substantial part of the increase in unemployment since the beginning of the recession reflected factors other than a shortfall in aggregate demand.
There was also no consensus on where consumer spending would go.
The minutes did show a factor that has been whispered among Fed watchers in the past few weeks: the fact that the most hawkish members of the Board - those more concerned about inflation than their peers - are losing influence.
The minutes show how Lacker, the Richmond Fed President, did not get traction with other members in arguing against the grain in many issues.
Not only was he overwhelmingly overruled in terms of his idea of how much guidance the Fed should provide, but he was essentially ignored when by his peers when took issue with the Fed's approval of certain open-market operations with foreign central banks, including currency swap transactions meant to provide liquidity overseas.
Mr. Lacker dissented in the votes on the Authorization for Foreign Currency Operations and the Foreign Currency Directive to indicate his opposition to foreign currency intervention by the Federal Reserve, the statement noted. In his view, such intervention would be ineffective if it did not also signal a shift in domestic monetary policy; and if it did signal such a shift, it could potentially compromise the Federal Reserve's monetary policy independence.
The Fed voted to approve those authorizations, going as far as giving the New York branch the power to adjust somewhat in exceptional circumstances the degree of pressure on reserve positions and hence the intended federal funds rate, a wide leeway that is not usually dispensed.
Markets Fall on News
U.S. equity markets were not happy on the Fed minutes.
The benchmark S&P 500 Index of U.S. equities dropped 39 basis points in the hour and a half following the realease of the minutes, recently trading at 1343.55.
More than likely, investors had priced in some kind of assurance from the Fed that a new round of quantitative easing was forthcoming.
QE3, LTRO1, asset purchases ... whatever these new names for old stunts are, sane or insane, clever or dumb, honest or dishonest ... the fact is, the market likes them. For few things are more appreciated by markets than a central bank which tinkers, Dylan Grice, a strategist at Société Générale had written in a note earlier Wednesday.