Fed minutes: More action to be considered in next meeting

FXstreet.com (C�rdoba) ? The minutes from the last meeting of the FOMC, when the Fed took a steep further and announced that rates will remain at current levels, at least least through mid-2013, showed a division among members about new measures that central bank could take to support the economic recovery. The Fed will debate on the next meeting on further action.

The minutes show that according to FOMC members the economic growth during 2011 was considerably slower that what they expected. ?Participants judged that temporary factors affecting demand and production, including the damping effect of higher energy and other commodity prices and the supply disruptions from the Japanese earthquake, could account for only some of the weakness in economic growth over the first half of the year.? Many members saw an increase in the downside risks to the outlook for economic growth.

?While participants did not anticipate a downturn in economic activity, several noted that, with the recovery still somewhat tentative, the economy was vulnerable to adverse shocks,? the minutes stated. The potential shocks include more weakness in household financial conditions, larger-than-expected near-term fiscal tightening, and a deterioration in the European crisis.

According to the minutes, the Fed discussed the range of policy tools available to support the economy. ?Some participants noted that additional asset purchases could be used to provide more accommodation by lowering longer-term interest rates,? while other suggested an increase in the average maturity of the Fed holding (informally know as operation twist). Another action that was evaluated was a reduction in the interest rate paid on excess reserve balances.

Not all members supported further action. ?Some participants judged that none of the tools available to the Committee would likely do much to promote a faster economic recovery, either because the headwinds that the economy faced would unwind only gradually and that process could not be accelerated with monetary policy or because recent events had significantly lowered the path of potential output.?

The FOMC decided that the next meeting, to be held in Sept 20 ? 21, would take two days instead of one, in order to provide more time to discuss further action.

During the August meeting, most members agreed that the economic outlook had deteriorated enough to warrant a response. Three members disagree. Fisher affirmed that the fragility of the economy was principally nonmonetary factors, such as uncertainty about fiscal and regulatory initiatives while Plosser warned that the reference to keep rates at extraordinarily lows levels until 2013 could be misinterpreted. The other member that disagreed was Kocherlakota.

Source: http://www.fxstreet.com/news/forex-news/article.aspx?storyid=2de3eea9-d570-4102-a415-af97d6914d36

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