Yesterday, the Federal Open Market Committee (FOMC) released minutes from the August 10, 2010 meeting, which indicated division over whether Federal Reserve officials should resume purchases of Treasury bonds and what impact the move could have on the nation’s economy.
After receiving staff reviews of the current economic situation, financial situation and economic outlook, the FOMC meeting participants “generally characterized the economic information received during the intermeeting period as indicating a slowing in the pace of recovery in output and employment in recent months.” Although the FOMC determined that near-term growth would likely be more modest, the participants continued to express the view that growth would increase in 2011. As a result, the members of the FOMC agreed to maintain the target range of 0 to 1/4 percent for the federal funds rate. The members continued to anticipate that “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, [would] likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
The minutes indicate that the FOMC also discussed the economic outlook if it continued its policy of not reinvesting principal repayments received on mortgage backed securities (MBS) or maturing agency debt. In the current economic conditions, most members of the FOMC believed it was better to reinvest in longer-term Treasury securities than in MBS. However, some members of the FOMC also recognized that, although reinvesting in Treasury securities is preferred in the current market conditions, reinvesting in MBS might be more desirable if conditions changed. Thus, consistent with Chairman Bernanke’s statements in his speech on Friday, the FOMC announced that it “will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.” However, the FOMC announced that it would continue to monitor the outlook and developments and would “employ its policy tools as necessary to promote economic recovery and price stability.”