–Retransmitting 15:30 ET Story

By Steven K. Beckner

(MNI) – Gloomier forecasts for economic growth, employment and
inflation led Federal Reserve policymakers to resume quantitative easing
at their Nov. 2-3 Federal Open Market Committee meeting, minutes of the
meeting released Tuesday show.

The Fed’s quarterly, three-year forecast prepared at the meeting
projects slower GDP growth and higher unemployment than in June.
Unemployment is projected at 8.9 to 9.1% next year, much higher than
previously forecast. Inflation is expected to rise a bit but stay well
below 2%.

The minutes reveal considerable differences of opinion about the
wisdom of doing large-scale purchases of Treasury securities, but show
that a majority felt that it was justified because the economy was
making “disappointingly slow” progress toward meeting the Fed’s
statutory “dual mandate” of full employment and price stability.

Although Fed officials have repeatedly denied that the purpose of
QE2 was to depreciate the U.S. dollar, the minutes show that a weakening
of the dollar was one of the ways which was seen as helping boost
economic activity. Concern was expressed, however, that QE2 could lead
to “unwanted” dollar weakness.

The main purpose of QE2, the minutes make clear, is to lower
long-term interest rates, but a number of officials disputed whether
doing so would contribute much to faster growth or lower unemployment.
And some feared untoward results, including excessive inflation.

Only Kansas City Fed President Thomas Hoenig actually dissented,
though, arguing that QE2’s costs exceeded its benefits, could
“undermine” the Fed’s independence and could push up inflation
expectations.

The minutes also disclose that, in an unscheduled Oct. 15
videoconference, the FOMC discussed the frequency of adjustments to the
Fed’s balance sheet, a long-term interest rate target, price level
targeting and communications issues, including whether or not Chairman
Ben Bernanke should hold periodic press briefings. No conclusions were
reached.

Most FOMC members preferred “a more incremental approach” to
“adjusting” the Fed’s securities holdings. And ultimately, on Nov. 3,
the FOMC voted to buy $600 billion between then and the end of the
second quarter of 2011, instead of the much larger amounts that some had
advocated.

Capsulizing the FOMC consensus view, the minutes say, “Participants
generally agreed that the most likely economic outcome would be a
gradual pickup in growth with slow progress toward maximum employment.
They also generally expected that inflation would remain, for some time,
below levels the Committee considers most consistent, over the longer
run, with maximum employment and price stability.”

However, FOMC participants disagreed about the risks to that
outlook.

“Most saw the risks to growth as broadly balanced, but many saw the
risks as tilted to the downside,” according to the minutes. “Similarly,
a majority saw the risks to inflation as balanced; some, however, saw
downside risks predominating while a couple saw inflation risks as
tilted to the upside.”

The minutes report that “participants also differed in their
assessments of the likely benefits and costs associated with a program
of purchasing additional longer-term securities in an effort to provide
additional monetary stimulus, though most saw the benefits as exceeding
the costs in current circumstances.”

“Most participants judged that a program of purchasing additional
longer-term securities would put downward pressure on longer-term
interest rates and boost asset prices,” say the minutes.

“Some observed that it could also lead to a reduction in the
foreign exchange value of the dollar,” the minutes add.

“Most expected these changes in financial conditions to help
promote a somewhat stronger recovery in output and employment while also
helping return inflation, over time, to levels consistent with the
Committee’s mandate,” the minutes continue.

“In addition, several participants argued that the stimulus
provided by additional securities purchases would help protect against
further disinflation and the small probability that the U.S. economy
could fall into persistent deflation — an outcome that they thought
would be very costly.”

But there were dissident voices. “Some participants, however,
anticipated that additional purchases of longer-term securities would
have only a limited effect on the pace of the recovery; they judged that
the economy’s slow growth largely reflected the effects of factors that
were not likely to respond to additional monetary policy stimulus and
thought that additional action would be warranted only if the outlook
worsened and the odds of deflation increased materially.”

“Some participants noted concerns that additional expansion of the
Federal Reserve’s balance sheet could put unwanted downward pressure on
the dollar’s value in foreign exchange markets,” the minutes go on.
“Several participants saw a risk that a further increase in the size of
the Federal Reserve’s asset portfolio, with an accompanying increase in
the supply of excess reserves and in the monetary base, could cause an
undesirably large increase in inflation.”

Others countered that the Fed “had in place tools that would enable
it to remove policy accommodation quickly if necessary to avoid an
undesirable increase in inflation.”

The FOMC voted to proceed with $600 billion in Treasury securities
purchases because “members considered progress toward meeting the
Committee’s dual mandate of maximum employment and price stability as
having been disappointingly slow. Moreover, members generally thought
that progress was likely to remain slow.”

“Accordingly, most members judged it appropriate to take action to
promote a stronger pace of economic recovery and to help ensure that
inflation, over time, is at levels consistent with the Committee’s
mandate,” the minutes add.

For the second straight meeting, the FOMC’s new quarterly, three
year economic projections for growth have been reduced. GDP growth is
now projected at 2.4 to 2.5% for 2010; 3.0 to 3.6% for 2011, 3.6 to 4.5%
for 2012 and 3.5 to 4.6% for 2013.

The long-term GDP forecast, which conveys the FOMC’s estimation of
the economy’s growth potential, was left unchanged at 2.5 to 2.8%.

The FOMC raised its projection of unemployment again. The
unemployment rate is projected at 9.5 to 9.7% in 2010; 8.9 to 9.1% in
2011, 7.7 to 8.2% in 2012, and 6.9 to 7.4% in 2013.

The FOMC’s projection for Inflation, as measured by the price index
for personal consumption expenditures, is 1.2% to 1.4% in 2010; 1.1 to
1.7% in 2011, 1.1 to 1.8% in 2012, and 1.2 to 2.0% in 2013.

Core PCE inflation is now projected at 1.0 to 1.1% in 2010, 0.9 to
1.6% in 2011, 1.0 to 1.6% in 2012 and 1.1 to 2.0% in 2013.

The FOMC’s summary of its projections reports that “somewhat more
than half of the participants judged that, in the absence of any
additional shocks to the economy, the economy would converge fully to
its longer-run rates of output growth, unemployment, and inflation
within about five or six years; the rest indicated that it could take
longer for unemployment to fall back to its longer-run rate or for
inflation to rise back to the level they deemed desirable in the longer
run.”

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