($MACRO) Goldman Sachs on FOMC Minutes: Officials Discussed Easing Options

BOTTOM LINE: Latest FOMC minutes suggest that further action at September 20-21 meeting a live possibility. 

MAIN POINTS:1.      Minutes from the August 9 FOMC meeting were consistent with our view that QE3 is coming. However, they were more dovish than expected, and indicate that the September meeting is an even closer call than we thought previously (for a summary of our latest views, see Jan Hatzius, “Q&A on Monetary Policy after Jackson Hole.” US Daily, August 29, 2011).  2.      The committee discussed a range of easing options, as signaled in the post-meeting statement. In addition, the minutes noted that “a few members felt that recent economic developments justified a more substantial move” at the meeting. Chicago Fed President Evans revealed in a CNBC interview this morning that he had argued for more aggressive action, but ultimately voted with the majority. The minutes show that other Fed officials felt the same.   3.      The discussion of easing options at the meeting was mostly consistent with previous public comments. The tools mentioned were: 1) asset purchases, 2) increasing the average maturity of the Fed’s portfolio, 3) cutting the interest rate on excess reserves, and 4) further reinforcing the committee’s forward guidance (which could include tying rate guidance to specific levels for economic indicators, like the unemployment rate and inflation). The minutes added a bit more detail around the idea of changing the composition of the Fed’s portfolio, saying that this would involve “selling securities with relatively short remaining maturities and purchasing securities with relatively long remaining maturities”. To our knowledge this is the first official comment on the mechanics of this approach. The different approaches each had some support among the committee. The minutes noted that “some participants judged that none of the tools available to the Committee would likely do much to promote a faster economic recovery”, but this was a minority view.   4.      With regard to the easing decision, the minutes said that all committee members thought that monetary policy could not completely resolve the economy’s problems, but “most members thought the committee could contribute importantly to better outcomes”. Interestingly, the minutes showed that those favoring further easing saw a change in the forward guidance as “a measured response”—as opposed to an aggressive step (the minutes noted that the 2013 funds rate guidance was consistent with “prescriptions for monetary policy based on historical and model-based analysis”, which suggests a Taylor Rule similar to our own).   5.      Finally, the minutes showed that Presidents Plosser and Fisher dissented largely because they viewed problems in the economy as nonmonetary in nature. President Kocherlakota dissented because he regarded the stance of monetary policy as already appropriate.