Mark Lieberman
FoxBusiness
4/6/2010
Members of the Federal Open Market Committee saw as much weakness as strength in economic data, according to minutes of the FOMC’s March 16 meeting made public Tuesday, and debated concerns about acting too quickly to raise interest rates.
According to the minutes “the duration of the extended period prior to” raising rates “might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further.”
Acknowledging how delicate the timing could be, the minutes said “a few members also noted that at the current juncture the risks of an early start to policy tightening exceeded those associated with a later start, because the Committee could be flexible in adjusting the magnitude and pace of tightening in response to evolving economic circumstances; in contrast, its capacity for providing further stimulus through conventional monetary policy easing continued to be constrained by the effective lower bound on the federal funds rate.
“While participants saw incoming information as broadly consistent with continued strengthening of economic activity, they also highlighted a variety of factors that would be likely to restrain the overall pace of recovery, especially in light of the waning effects of fiscal stimulus and inventory rebalancing over coming quarters,” the minutes said. “While recent data pointed to a noticeable pickup in the pace of consumer spending during the first quarter, participants agreed that household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth.”
The minutes offered more detail on the dissent by Kansas City Fed President Thomas Hoenig, who was the lone “no” vote as the FOMC decided to leave the target fed funds rate unchanged at 0% to 0.25% where it has been since December 2008. Hoenig dissented not from the decision, but from the language used in the Committee’s meeting-end statement.
Hoenig, according to the minutes, “dissented because he believed it was no longer advisable to indicate that economic and financial conditions were likely to warrant ‘exceptionally low levels of the federal funds rate for an extended period.’”
Hoenig “was concerned that communicating such an expectation could lead to the buildup of future financial imbalances and increase the risks to longer-run macroeconomic and financial stability” and preferred the Committee “express its anticipation that economic conditions were likely to warrant ‘a low level of the federal funds rate for some time.’”
According to the minutes, Hoenig offered the “change in communication would provide the Committee flexibility to begin raising rates modestly” and “making such an adjustment to the Committee’s target for the federal funds rate sooner rather than later would reduce longer-run risks to macroeconomic and financial stability while continuing to provide needed support to the economic recovery.”
While Hoenig was the only Committee member to record a dissent, the minutes said “a number of members noted that the Committee’s expectation for policy was explicitly contingent on the evolution of the economy rather than on the passage of any fixed amount of calendar time.”
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