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Weekly Economic Commentary


Minutes of June FOMC Meeting: Weak Economic Data Should Trigger Additional Monetary Policy Easing

July 11, 2012

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Additional monetary policy accommodation from the Fed in the months ahead is nearly certain but the timing will be tied to the nature of forthcoming economic data. This observation is not new and it is once again appropriate after reading the minutes of the June 19-20 FOMC meeting. The minutes indicate that a “few members” held the opinion that additional monetary policy easing would be “necessary” to enable the Fed to meet its dual mandate of full employment and price stability, while “several members” noted that they would consider additional easing of monetary policy if the “economic recovery were to lose momentum, if the downside risks to the forecast became sufficiently pronounced, or if inflation seemed likely to run persistently below the Committee’s long-run objective.” It is important to note that a similar discussion was not part of the April FOMC meeting. Therefore, it is appropriate to conclude that the FOMC’s level of concern about the economy has changed and it will pull the trigger if economic data are indeed weak. Bernanke’s testimony of July 17-18 will offer additional insight.

The important question is if the Fed will purchase additional long term securities, lower interest on reserves, or change the forward guidance language to indicate that exceptionally low interest rates will prevail until mid-2015 in order to ease monetary policy. The minutes of the June meeting do not offer hints about these options but the minutes contained a noteworthy statement to keep in mind:

“Several participants commented that it would be desirable to explore the possibility of developing new tools to promote more accommodative financial conditions and thereby support a stronger economic recovery.”

In light of these remarks, it is fair that markets should not be surprised with “new” unconventional monetary policy action in the near term.

Lower Oil Prices Translate to Smaller Deficit in May

The trade deficit narrowed to $48.7 billion in May from $50.6 billion in the prior month. The main driver of the reduction in the trade deficit was oil prices. Imports of petroleum in inflation adjusted dollars fell 3.9% in May, while imports of non-petroleum goods increased 1.3% in the same period. The April-May trade numbers suggest a small narrowing of the trade deficit from the first quarter, assuming no surprises in June.
Chart 1 - 07 11 2012

Exports of goods and services posted a small gain of 0.2% in May compared with a 0.9% decline in April. However, real exports of goods moved up 1.0% following a 1.5% drop in April. The rebound in exports is important given expectations of slow growth among trading partners of the US. Imports of goods and services slipped 0.7% in May, but real imports of goods rose 0.3%. In May, the trade deficit widened vis-à-vis China, Japan, Eurozone, and Mexico, but narrowed vis-à-vis Canada.

Table 1 - 07 11 2012













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.