Tuesday, August 30, 2011

Summary of August FOMC Minutes

In case you may not have read the FOMC minutes (released this afternoon) or read all the headlines in early August, we thought a summary of those minutes might be useful. Full detail is available on the Fed's website.  We note that we have cited most of what is discussed below in our previous posts, going back to 2010.

Staff Review of Economic Situation
  • Pace of recovery remains slow; recovery during 1H '11 "quite sluggish"
    • Weak labor market
    • High initial claims
    • Lower labor force participation
  • Recession worse than initially thought
  • Expect stable long-run inflation
  • Not much change in manufacturing
    • Excl. motor vehicles production, other output posted "only a modest increase."
    • Flat capacity utilization
    • Indications of "only small gains in production in the coming months."
  • Q2 consumer spending pretty much flat
    • Auto sales rebounded in June
    • Nominal wages up in Q2 but offset by higher prices
    • Decline in consumer confidence
  • "Housing market remained depressed"
    • Prices trended lower
    • Not much new construction due to high current inventory and weak demand
  • Business spending up, driven mostly by spending on high-tech equipment
    • Orders for non-defense (excl. aircraft) were up
    • Investments in non-residential stablized at low levels
    • Besides in motor vehicles, inventories aligned with sales
  • Federal spending up, driven by defense spending; state & local spending down
  • Real exports exceeded real imports in Q2
  • Not much change in CPI and PCE index as downward pressure on food and energy offset by rise in core prices --> meaning inflation continued to increase
  • Nominal hourly compensation up in Q2 more than productivity in non-farm business; driving up unit labor costs --> could create more pressure on the labor market
  • Slowdown in international growth

Review of the Financial Situation
  • Equity market's reaction to the end of QE2, weak economic reports, S&P downgrade, and troubles in Europe
  • Improvement in business credit quality during Q2
  • Weak commercial real estate markets, but delinquency and vacancy rates decreased slightly
  • Improvement in consumer credit markets
  • Core commercial bank loans flat in June and July (slowdown in lending to businesses offset by more loans to households)
  • Lending standards eased, except for residential real estate loans. Standards remained "between moderate to relatively tight" compared with standards since 2005.

Staff Economic Outlook
  • Lowered real GDP growth estimates for 2H '11, 2012 and additional years down the road; but expect overall positive growth, but the labor market to remain weak through 2012
  • Expect short-term bounce in economic growth driven by easing of the Japan-related supply chain disruption
  • Upped inflation expectations, but expect lower energy and food prices, easing inflationary pressure; "expect prices to rise at a subdued pace in 2012."

Participants' View on Current Conditions and Economic Outlook
  • Overall weaker than expected conditions driven only partially by temporary factors; "underlying strength of the economic recovery remained uncertain".
  • Long-term unemployment can impact skills and ability to find jobs
  • Not much of a match between the unemployed and available jobs
  • Extended unemployment benefits has likely kept some out of the labor force, lowering the labor force participation rate
  • Lower labor force participation rates likely a driver of slightly improved unemployment rate, rather than improvement in overall employment.
  • Lack of business confidence impacting hiring decisions
  • Some expect inflation to decline due to weak labor and product markets, lack of much wage growth, and not much pricing power.
  • Some noted that core inflation has moved up
  • Lower than expected consumer spending driven by lack of confidence, not much wage growth, balance sheet clean-up, and declining home prices.
  • Some see downside risk to recovery, but no contraction (or recession)
  • Economy and markets may be vulnerable to adverse shocks
  • Most agreed that they would use any/all tools necessary to help the economy grow, but some said that more stimulus won't make much of a difference except that it increases risk of too much inflation.
  • As basically a compromise, they agreed to keep rates low until at least mid-2013.
  • Discussed setting similar short-term objectives for the unemployment rate, but did not do it
  • Hinted that basically, if necessary, the Fed would take additional steps at the end of Sept.
  • All members except for Fisher, Kocherlakota and Plosser agreed with the decision.


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