(By Kevin Donovan) Using the latest minutes of the Federal Open Market Committee to divine future Fed action is, as critics often say of the Fed itself, driving by the rear-view mirror.
The meeting, held some three weeks before the release of the disappointing June employment report, was widely seen revealing reluctance for further accommodation.
But, as the kids say, stuff happens. We believe the FOMC will move ahead with further purchases of financial assets -- quantitative easing round three -- if the key data come in as weak as they have. By that, we mean another month of sub-100,000 employment growth and another sub-50% diffusion index from the ISM's survey of purchasing managers, two series that the FOMC and the Fed staff noted in the minutes they were paying attention to.
And though largely unremarked, a strain of easing sentiment expressed at the June FOMC meeting could become the prevailing view when the FOMC meets July 31-Aug. 1, the minutes, released yesterday, showed.
"A few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth in employment and to ensure that the inflation rate would be at the Committee's goal. Several others noted that additional policy action could be warranted if the economic recovery were to lose momentum, if the downside risks to the forecast became sufficiently pronounced, or if inflation seemed likely to run persistently below the Committee's longer-run objective.
"The Committee agreed that it was prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability."
The more reluctant committee members also had their say: "A few members observed that it would be helpful to have a better understanding of how large the Federal Reserve's asset purchases would have to be to cause a meaningful deterioration in securities market functioning, and of the potential costs of such deterioration for the economy as a whole."
One member, Jeffrey Lacker, even opposed the FOMC's relatively mild policy action to extend "Operation Twist." The Richmond Fed president is of the view that structural impediments to full employment are beyond the Fed's cyclical tools to fix and all that easier policy will do is sow the seeds for inflation down the road.
But an inclination to act was seen in comments this week by three Fed officials.
In a speech to a bankers' convention in Idaho, John Williams, the president of the San Francisco Federal Reserve Bank and a voting member of the FOMC, said: "In these circumstances, it is essential that we provide sufficient monetary accommodation to keep our economy moving towards our employment and price stability mandates."
The most effective way to do that he said "would be additional purchases of longer-maturity securities, including agency mortgage-backed securities. These purchases have proven effective in lowering borrowing costs and improving financial conditions."
Boston Fed President Eric Rosengren said more quantitative easing was called for as job growth has stalled and the global economy teeters.
And Chicago Fed president Charles Evans joined the chorus for more action to counter stubbornly weak conditions. "I support using our balance sheet to provide additional accommodation," Evans said.
Intriguingly, the FOMC appeared to be groping for some new mechanism to kick start economic growth. With the Fed Funds rate target essentially at zero and "Twist" and quantitative easing having failed to deliver the desired result "several participants commented that it would be desirable to explore the possibility of developing new tools to promote more accommodative financial conditions and thereby support a stronger economic recovery."
But for now, the Fed has to fight with the army it has.