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Weekly Economic Commentary


Minutes January 24-25 FOMC Meeting: Divided House about Additional Quantitative Easing

February 15, 2012

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The minutes of the FOMC meeting of January 24-25 presented a range of opinions about whether further monetary accommodation through asset purchases (QE3) is necessary. At one end of the spectrum, “a few members observed that, in their judgment, current and prospective economic conditions – including elevated unemployment and inflation at or below the Committee’s objective – could initiate the purchases of additional securities before long.” A more qualified position was held by other members who indicated that “such policy action would become necessary if the economy lost momentum or inflation seemed likely to remain below is mandate consistent rate of 2 percent in the medium run.” In stark contrast to these two opinions that suggest an inclination toward additional asset purchases or QE3, on member viewed maintaining the current extent of monetary accommodation more than the near term as “inappropriate.”

The discussion about risks to the forecast was dominated by concerns about ongoing economic and financial developments in Europe and the possibility that spillovers from the financial and fiscal issues would be larger than assumed at the present time. As a result, “a majority of participants continued to report that they saw the risks to their forecasts of real GDP growth as weighted to the downside and, accordingly, the risks to their projections for the unemployment rate as skewed to the upside.” Risks pertaining to the FOMC’s projections of inflation were presented as broadly balanced.

The minutes also included “qualitative information” on the views of member with regard to the balance sheet of the Fed. A number of members indicated that “they remained open to a consideration of additional asset purchases if the economic outlook deteriorated.” Most members held the view that sales agency securities would not commence until 2015 and it would take 3-5 years to eliminate holdings of agency securities. Members expecting to raise the federal funds rate sooner than others called for earlier adjustments. One member assumed an early end of the maturity extension program that is underway. Essentially, the minutes point to the prevalence of a range of opinions about the prospects about additional asset purchases. A reasonable inference is that the nature of incoming economic data will determine if QE3 will be implemented.

January Industrial Production: Factory Sector Maintains Momentum

Industrial production held steady in January following upward revisions of estimates of November (0.0 vs. -0.3%) and December (+1.0% vs. +0.4%). The 2.5% decline in production at the nation’s utilities due to warmer than typical weather conditions and a 1.8% drop in the mining component offset the 0.7% surge in factory production during January. In addition to the 6.8% jump in auto production in January, factory production excluding autos rose 0.4%. The diffusion index at 64% suggests that gains in production were widespread.

DEC 2 15 2012 Chart 1

DEC 2 15 2012 Chart 1a

February Home Builders Survey – One More Positive Signal to Note

The Housing Market Index (HMI) of the National Association of Home Builders rose to 29.0 in February, the highest since May 2007. Indexes tracking current sales (30 vs. 25 in January), sales in the next six months (34 vs. 29), and prospective buyers (22 vs. 21) moved up in February. Housing starts numbers to be published tomorrow will indicate if actual home building gathered steam.

DEC 2 15 2012 Chart 2


The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.