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The minutes of the September 20-21 FOMC meeting indicate that several members see significant downside risks to economic growth. They do not project a decline in GDP, but noted that the economy was vulnerable to adverse shocks. In this context, the sources of adverse shocks included pronounced or more protracted deleveraging by households, the chance of a large-than-expected near-term fiscal tightening, and potential spillovers to the United States if the financial situation in Europe were to worsen appreciably.
The FOMC views that risks are balanced with regard to inflation. Stable inflation expectations and a continued dissipation of the impact of the past increases in energy and commodity prices are factors that support members cited to support projections of both headline and core inflation settling close to levels consistent with the Feds dual mandate. The minutes indicate that despite these expectations, the outlook for growth and inflation as more uncertain than usual.
The September meeting included an extensive discussion of tools available to support the economy if economic conditions weaken. The deliberations were focused on three options. First, reinvest principal payments it receives on holdings of agency bonds in long-term Treasury securities. Second, purchases long-term Treasury securities and sell a matching amount of shorter-term Treasury securities in such a manner that reserves and the Feds balance sheet would not be affected. Third, the FOMC would purchase longer-term Treasury securities and increase the balance sheet size of the Fed. The minutes note that a large number of participants saw large-scale asset purchases as a more potent tool that should be retained as an option in the event further policy action to support a stronger economic recovery was warranted.
The FOMC chose the second option of the three, which is known as Operation Twist. The vote was 7-3 in favor of Operation Twist. The minutes reveal that two members would have preferred to take more aggressive steps compared with Operation Twist. They were willing to consider Operation Twist because additional future support was not ruled out. The implications of reducing interest on reserve balances (IOR) were also part of the discussion. A range of opinions were presented and it was noted that additional information would be necessary to assess the usefulness of this tool in the current economic environment.
The minutes also show that the Committee is examining modifications of its communications policy: Most participants indicated that they favored taking steps to increase further the transparency of monetary policy, including providing more information about the committees longer-run policy objectives and about the factors that influence the committees policy decisions. The Committee also looked into ways to elucidate the economic conditions that could warrant raising the level of short-term interest rates. Overall, it appears that the Fed is working on improving its communication about monetary policy changes with the public.