Monthly Archives: February 2010

The Federal Open Market Committee (FOMC) released the minutes of its January meeting, which showed that the Committee believes that downside risks to the economic recovery are diminishing and inflation will remain in check for the next two years.

The staff economic outlook continued to see moderate economic growth for the next two years.  The interesting part was that the staff believed growth would continue in part due to “the accommodative stance of monetary policy and by a further waning of the factors that weighed on spending and production.”  In other words, the FOMC staff does not see the Fed raising rates significantly or pulling back liquidity over the next two years.

As far as the outlook is concerned, the FOMC members generally agreed with the staff outlook.  “Participants expected the economic recovery to continue, but most anticipated that the pickup in output and employment growth would be rather slow relative to past recoveries from deep recessions. A moderate pace of expansion would imply slow improvement in the labor market this year, with unemployment declining only gradually. Most participants again projected that the economy would grow somewhat more rapidly in 2011 and 2012, generating a more pronounced decline in the unemployment rate, as financial conditions and the availability of credit continue to improve. In general, participants saw the upside and downside risks to the outlook for economic growth as roughly balanced.”

In addition, with regard to inflation, the staff believed that price increases for goods and services were likely to remain subdued due to resource slack over the next two years.  However, members’ opinions on inflation are significantly split.  “Participants agreed that underlying inflation currently was subdued and was likely to remain so for some time. Some noted the risk that, with output well below potential over the next couple of years, inflation could edge further below the rates they judged most consistent with the Federal Reserve’s dual mandate for maximum employment and price stability; others, focusing on risks to inflation expectations and the challenge of removing monetary accommodation in a timely manner, saw inflation risks as tilted toward the upside, especially in the medium term.”

This is why what the Fed does over the course of the next year may be the most significant development with regard to economic growth, inflation, and equity and bond markets, outside of what Congress does.  Raise rates and tighten monetary policy too early, and, like 1937, the economy could crash all over again.  Fail to tighten policy soon enough, and like the late 1970s and early 1980s, inflation could run rampant and stall the economic recovery.  Moreover, new asset bubbles may form, as holding cash in an inflationary period is a severe penalty.

To view the FOMC minutes, please click on the following link: Minutes of the Committee meeting held on January 26-27, 2010.