The minutes of the Federal Open Market Committee’s (FOMC’s) April 2010 meeting show that committee members generally believed that the economy was recovering, but needed the continued assistance of very low interest rates. The usual dissenter, Thomas Hoenig, wanted to raise the federal funds target rate immediately to 1 percent from the current range of 0 to 0.25 percent.
Participants expected that economic growth would continue: Recent data pointed to significant gains in retail sales, business spending on equipment and software had picked up substantially, and reports from business contacts and regional surveys indicated that production was increasing briskly in many sectors. Participants agreed that the growth in real GDP appeared to reflect a strengthening of private final demand and not just fiscal stimulus and a slower pace of inventory decumulation; this welcome development lessened policymakers’ concerns about the economy’s ability to maintain a self-sustaining recovery without government support. Businesses appeared to be gaining confidence in the economic recovery, and narrowing credit spreads in private debt markets were allowing low policy rates to be reflected more fully in the cost of capital. At the same time, rising stock prices and the apparent stabilization of house prices were helping to repair household balance sheets. As a result, consumers and firms were beginning to satisfy demands for durable goods and capital equipment that had been postponed during the economic downturn. Many participants noted that employment had increased in recent months, and that they expected a further firming of labor market conditions going forward. A stronger labor market could continue to boost consumer and business confidence and so contribute to further gains in spending.
It is interesting to note the members’ view that business confidence is tied to the narrowing of credit spreads in private debt markets. Since the meeting, the havoc in Europe has caused credit spreads to spike higher. That alone would explain the panic in equity markets. Such panic may turn into a full-on market crash if Europe does not make more moves to restore confidence – their usual bickering and in-fighting is no longer amusing. Should Europe be able to restore some confidence in credit markets, look for equity markets to head higher.
To view the full set of FOMC minutes, please click on the following link: FOMC Minutes April 2010.
Gregg D. Killoren
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