The Federal Reserve Board primarily communicates monetary policy to the public via a brief statement following the conclusion of the regularly scheduled Federal Open Market Committee (FOMC) meetings, and then by releasing the minutes from the meeting, providing a more detailed account of the deliberations, typically three weeks after the meeting. The Fed released the minutes from the September 20-21 meeting on October 12.

The minutes went beyond the earlier statement’s characterization of economic growth as weak, revealing that the forecast prepared for the September meeting projected slower output growth in the second half of 2011 and next year than was projected at the August meeting, due primarily to weaker indicators of labor market conditions, consumer and business sentiment.

The maturity extension program, or “operation twist” as dubbed in the press, purchasing $400 billion of longer-term Treasury securities while selling the same amount of short term securities, was one of three major options considered at the meeting. A continuation of the status quo and a new round of large-scale asset purchases were also considered.

A range of views were expressed on the efficacy of the options with respect to interest rates and economic activity. There was some agreement that additional large-scale asset purchases would be the most potent tool should further policy action be warranted, and some concern that this option would raise inflation and inflation expectations. Some discussion was also devoted to the implications of reducing the interest rate paid on the reserve balances of depository institutions.

A less reported on change in policy was the decision to reinvest principal payments from agency debt and agency MBS in agency MBS, rather than longer-term Treasury securities (the status quo). This action was judged to be likely to have a more direct impact on mortgage rates. Despite historically low mortgage rates, the spread between Treasury securities, MBS and fixed rate mortgages has been widening.