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Summary:
January’s FOMC meeting show
no expectation that rates or
inflation is soon to explode higher.
GDP
3.2% economic growth in 2010, up from about 3% expected just in November.
These minutes, suggest the possibility
the end of a near-zero rate policy appears to be much closer to an end than we have seen in quite some time.
FOMC was spending more time evaluating h
ow would be best to unwind the billions (or is it trillions now?) of stimulus. One potential is the sale of mortgage-backed securities.
Officials now expect see
core inflation of 1.4% in 2010, up from 1.3% expected in November.
On the
unemployment rate, the FOMC expects 9.6% in Q4-2010 versus a prior expectation of 9.5%.
The largest change here is not really on the Fed Funds rate, but there was at least some contemplation of a change to the discount rate.
It discussed a hike 25 basis-point hike in the discount rate as a tool of withdrawing some of the floodgate money that had been opened to the economy.
It is extremely rare to see changes in the discount rate without a change in the Fed Funds rate. A move of that extent would have still likely caused banks to raise their Prime Rate from 3.25% today, which it has been for more than a year, to 3.50%.
Rates will rise ultimately. Whether “some time” or an “Extended period of time” prevails, rates can’t go under zero where they effectively sit today.
Federal Reserve Open Market Committee (FOMC) minutes from January show that many officials have started to ponder
when the central bank should shrink its $2.26 trillion balance sheet.
Federal Reserve committee members
agreed unanimously that
Fed assets and the excess cash in the banking system will need to be reduced substantially over time.
The Federal Reserve has flooded the market with cash in the past year, snatching up Treasuries and mortgage backed securities in order to provide liquidity. Those buying programs have been winding down in recent months, but have left the Fed with a ballooned balance sheet.
FOMC meeting shows that despite all members agreeing on shrinking the balance sheet,
the method of how is being debated.
Some Fed policy makers are pushing
to sell assets in the "near future."
They want to begin asset sales "to ensure that the Federal Reserve's balance sheet shrinks more quickly and in a more predictable manner than could be achieved solely by redeeming maturing securities and not reinvesting prepayment,"
If the Fed were to begin selling assets, that would not only remove the demand they have contributed the past year from buying programs, but also add additional supply to the market.
