US FOMC March 16 Minutes Provide Balanced View of Risks to the Economy and the Interest Rate Outlook

April 6th, 2010 - The minutes released this afternoon from the March 16 FOMC meeting provided some background discussion that lay behind the statement that was released at the conclusion of that meeting. The statement contained very little in terms of surprises although it seemed to hint at a slightly more upbeat assessment of the economic recovery. Today’s minutes reinforced this impression of commenting that “participants agreed that economic activity continued to strengthen and that the labour market appeared to be stabilizing.” This was qualified by the observation that incoming data confirmed that the “economic recovery was likely to proceed at a moderate pace;” however, the revised outlook for growth was not significant enough to alter Fed’s view that inflation is “likely to be subdued for some time.” In fact, today’s minutes revealed that FOMC members “saw recent inflation readings as suggesting a slightly greater deceleration in consumer prices than had been anticipated.”

Given the economic outlook, the minutes reiterated that “nearly all members judged” that the current, very low level of interest rates is likely to be warranted “for an extended period.” Fed President Hoenig seemed to remain the lone dissenter expressing the view that “it could lead to the build up of financial imbalances and increase risks to longer-run macroeconomic and financial stability.” The minutes revealed some discussion that the “extended period” of low interest rates “might last for quite some time” although it would be warranted only in the face of an appreciable worsening in the economic outlook or the trend in inflation declining further. This scenario was balanced by the obverse situation that policy could be tightened promptly if “economic activity was accelerating markedly or underlying inflation was rising notably.” As well, the minutes noted that “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” although this bias may be more a reflection of technical rather than economic factors.

The FOMC statement also indicated that the central bank was winding down various liquidity measures and asset purchase programs introduced at the height of the financial crisis. Today’s minutes revealed further that FOMC members were reassured that there were no signs of any financial market strains in the face of the winding down of the special liquidity facilities. As well, it was noted that “securitized credit markets had not shown any substantial strain from the anticipated end of the new credit extensions under the Term Asset-Backed Securities Loan Facility (TALF).”

The minutes from the March 16 FOMC do not suggest any material shift from what was stated immediately following that meeting. Indications that economic activity was strengthening gradually was balanced by expectations that inflation was likely to remain subdued with recent numbers surprising on the downside. Although the minutes revealed some discussion of prolonging the period of low interest rates, it was balanced by comments indicating the preparedness to start tightening sooner. None of the discussion, however, implied any imminent move on interest rates with near-term actions focused on winding down various liquidity and asset purchase programs. The minutes appear consistent with our forecast that Fed funds will not be hiked until the final quarter of this year.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.