Federal Open Market Committee Minutes: A Glimpse Behind the Curtain


Last week the Federal Reserve Board released the minutes from the December 13 Federal Open Market Committee (FOMC) meeting. The minutes provide much more detail on the deliberations of the committee than the brief statement which is released immediately following the meeting.

The review of US economic conditions between the November and December meetings identifies an economy that is expanding moderately, labor market conditions that have improved somewhat, overall consumer inflation that is more modest than earlier in the year, and stable expectations of long run inflation rates.

Housing market conditions are characterized as depressed by the inventory of foreclosed properties, weak demand, tight mortgage credit conditions and uncertainty about future home prices. Additional detail is provided on personal income and spending, business investment, industrial production, the government sector, international trade, and global economic growth.

A review of financial market conditions points to fiscal and financial difficulties in Europe as a major contributor to heightened volatility in financial markets, with particular focus on various interest rate spreads as indicators of stress in short term funding markets. Residential mortgage rates remain flat at historically low levels, but tight underwriting standards and low home equity have restrained refinancing activity. Overall consumer credit quality has improved, with delinquency rates declining on both credit cards and non-revolving credit at commercial banks.

Fed projections for near term GDP growth at the December meeting were little changed since the November meeting, while medium term growth was lower, reflecting concern about developments in Europe, but the projections continue to show improvement in 2012 and 2013.

The minutes provide an interesting opportunity to view areas of consensus and disagreement among meeting participants. Without identifying individuals, opposing points of views on a range of issues are noted. The issues include the sustainability of increases in consumer spending, given recent declines in personal income growth, the possible overstatement of labor market improvements, given the role declines in labor force participation have played, as well as the view that the considerable slack in resource utilization may lead to inflation rates that are below, rather than above, acceptable levels.

One issue that has received a great deal of attention in recent FOMC deliberations is the desire to enhance the clarity and transparency of monetary policy decisions in public communications. As a result, beginning in January, meeting participants’ projections of the appropriate level of the target federal funds rate will be included in the Summary of Economic Projections (SEP), which are released four times a year. Included will be projections for the fourth quarter of the current year, several more calendar years, and the longer run. Also included will be projections of the timing of the first increase in the target rate, given projections of future economic conditions, as well as a narrative describing key factors underlying the projections and expectations for the Federal Reserve’s balance sheet.

This is a huge development in terms of revealing the secrets of the temple, and the subject of divergent views within the FOMC. The hope is that this will provide clarity rather than confusion over monetary policy movements. To the extent that this reduces uncertainty in financial markets and eases the current tight credit conditions, this could be a significant development.


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