FOMC minutes: Some in Fed concerned of Euro contagion spreading

The Fed published the minutes from the April 27/28 FOMC meeting this afternoon. Below are some key quotes:

On asset sales

“Participants expressed a range of views on some of the details of a strategy for asset sales. Most participants favored deferring asset sales for some time. A majority preferred beginning asset sales some time after the first increase in the Federal Open Market Committee's (FOMC) target for short-term interest rates. Such an approach would postpone any asset sales until the economic recovery was well established and would maintain short-term interest rates as the Committee's key monetary policy tool.”

“The views of participants also differed to some extent regarding the appropriate pace of asset sales. Most preferred that the agency debt and MBS held in the portfolio be sold at a gradual pace that would complete the sales about five years after they began.”

“No decisions about the Committee's longer-run strategy for asset sales and redemptions were made at this meeting. For the time being, participants agreed that the Desk should continue the interim approach of allowing all maturing agency debt and all prepayments of agency MBS to be redeemed without replacement while rolling over all maturing Treasury securities. Participants agreed to give further consideration to their longer-run strategy at a later date.”
On European debt problems

“participants saw the escalation of fiscal strains in Greece and spreading concerns about other peripheral European countries as weighing on financial conditions and confidence in the euro area. If other European countries responded by intensifying their fiscal consolidation efforts, the result would likely be slower growth in Europe and potentially a weaker global economic recovery. Some participants expressed concern that a crisis in Greece or in some other peripheral European countries could have an adverse effect on U.S. financial markets, which could also slow the recovery in this country.”
On the policy outlook

“On balance, the economic outlook had changed little since the March meeting. Even though the recovery appeared to be continuing and was expected to strengthen gradually over time, most members projected that economic slack would continue to be quite elevated for some time, with inflation remaining below rates that would be consistent in the longer run with the Federal Reserve's dual objectives. Based on this outlook, members agreed that it would be appropriate to maintain the target range of 0 to ¼ percent for the federal funds rate. In addition, nearly all members judged that it was appropriate to reiterate the expectation that economic conditions--including low levels of resource utilization, subdued inflation trends, and stable inflation expectations--were likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
BOTTOM LINE: For all the media hype prior to the April Fed meeting about growing support among some Fed officials for a program of asset sales, these Fed minutes stress that “most” policymakers favor deferring asset sales “for some time,” only beginning sales after rates hikes have begun (and then normalizing the balance sheet very gradually, completing asset sales about five years after they have begun). There was some concern about the impact of the sovereign debt crisis in Europe, but the Fed’s outlook was little changed from the March meeting. The FOMC’s central tendency forecasts show upgraded growth estimates in the near term and lower inflation projections through their forecast horizon. Interestingly, despite elevated unemployment rates and unemployment duration, the Fed still sees the long-run unemployment rate at 5% to 5-1/4%. The attached Fed monitor file summarizes the Fed’s forecasts.


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