The Federal Reserve released the minutes Wednesday from the June 19-20 meeting of the Federal Open Market Committee, or FOMC. The FOMC is responsible for setting monetary policy and short-term interest rates.
Unemployment is uncomfortably high, economic growth projections are down, and uncertainty about the future is way up, according to the minutes
But that's nothing new. The June meeting did seem a bit more contentious than usual, the report reveals.
Committee members disagreed on some of the underlying causes of the current economic conditions as well as the need for further stimulus either at the June meeting or in the near future based on the evidence available last month.
They did agree the situation in Europe became more of a threat to the U.S. between April, the month of the previous meeting, and June -- and that it could threaten the shadow banking system.
Although signs of strains in short-term funding markets were muted, the reliance of some financial firms on these markets remained a potential vulnerability, given that investors could withdraw rapidly in a period of financial stress.
Though market participants were taking steps to mitigate their exposure, the minutes report, a breakdown in the shadow banking system could lead to a situation similar to the "credit crunch" of 2008 when these short-term funding markets froze.
There was a clear division among the meeting participants, which included the seven members of the Board of Governors and the presidents of the 12 Federal Reserve Banks, as to the nature of the slowdown in the economy in the second quarter of the year. Not all meeting participants are voting members of the FOMC.
Most of the participants felt that it was likely to drag on for some time and would affect economic growth in the medium term, while others believed it would blow over relatively quickly.
Most participants saw the incoming information as indicating somewhat slower growth in total demand, output, and employment over coming quarters than they had projected in April, and most carried forward some of that downward revision to their projections of medium-term growth. However, some participants judged that the recent weakness in a variety of economic indicators was more likely to prove transitory, and thought that the outlook beyond this year was essentially unchanged.
The way individual participants viewed the slowing growth in the second quarter likely colored their opinions on the need for further quantitative easing.
There were participants at the June meeting who believe that another quantitative easing program "would likely be" necessary to boost employment and keep inflation near the committee's preferred level of 2 percent.
Still others said that additional easing would be warranted if the economy were to slow down further or if any of the crowd of downside risks intensified.
Here's an interesting tidbit.
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.
There is a concern within the committee that ongoing Treasury purchases could eventually break down the Treasury securities market. Since last year, analysts and economists have been expecting another round of mortgage-backed securities purchases, in addition to or instead of Treasuries. If another round of easing does become necessary, that may be one option for the FOMC.
One last tidbit
Though Bernanke did mention in the press conference following the June meeting that one of the intended goals of ultra-low interest rates was to push investors into riskier assets, "a few participants indicated that they were seeing signs that very low interest rates might be inducing some investors to take on imprudent risks in the search for higher nominal returns," the minutes show.
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