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Highlights
The latest FOMC minutes for the April 24-25 meeting indicated that there was at least incremental inclination for QE3 if the economy loses momentum. Instead of "a couple" of participants being in favor of additional ease if the economy worsens as seen in the minutes of the March meeting, it now is "several." However, this does not change the fact that most members are emphasizing costs likely outweighing benefits of such a move.
Also, more recent economic data have been more positive and monetary policy currently is still extremely loose. The Fed continues to state that exceptionally low policy rates are likely through 2014. So, the condition of a worsening economy is not happening, meaning QE3 is not going to be implemented. Of note, St. Louis Fed President James Bullard in a speech this afternoon specifically pointed out the improvement in economic news for the U.S. economy.
The minutes add little to the known Fed outlook for the economy as the FOMC released relatively detailed forecast numbers just before the chairman's press conference on April 25. The Fed still sees moderate growth in coming quarters and a gradual decline in unemployment.
"In the economic forecast prepared for the April FOMC meeting, the staff revised up slightly its near-term projection for real gross domestic product (GDP) growth, reflecting that the unemployment rate was a little lower, the level of overall payroll employment a bit higher, and consumer spending noticeably stronger than the staff had expected at the time of the previous forecast. However, the staff's medium-term projection for real GDP growth in the April forecast was little changed from the one presented in March. The staff continued to project that real GDP would accelerate gradually through 2014, supported by accommodative monetary policy, further improvements in credit availability, and rising consumer and business sentiment. Increases in economic activity were expected to be sufficient to decrease the wide margin of slack in the labor market slowly over the projection period, but the unemployment rate was anticipated to still be elevated at the end of 2014."
"The staff's forecast for inflation over the projection period was just a bit above the forecast prepared for the March FOMC meeting, reflecting somewhat higher-than-expected data on core consumer prices and a slightly narrower margin of economic slack than in the March forecast. However, with the pass-through of the recent run-up in crude oil prices into consumer energy prices seen as nearly complete, oil prices expected to edge lower from current levels, substantial resource slack persisting over the projection period, and stable long-run inflation expectations, the staff continued to forecast that inflation would be subdued through 2014."
The Fed still sees headwinds from Europe and a possible fiscal cliff.
Of course, Richmond Fed President Jeffrey Lacker dissented again on the statement, indicating that he believes rates will need to go up before the end of 2014. On an interesting aside, the minutes pointed out that Lacker also voted against the Fed extending reciprocal currency (swap) arrangements with the Bank of Canada and the Banco de México for an additional year beginning in mid-December 2012. Lacker dissented because of his opposition, as indicated at the January meeting, to foreign exchange market intervention by the Federal Reserve, which such swap arrangements might facilitate, and because of his opposition to direct lending to foreign central banks. The good news here is that the Fed is willing to debate policy and finds dissent acceptable as part of the process.
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