WASHINGTON (MNI) – The following is the second part of the text of
the Participants’ Views On Current Conditions and the Economic Outlook
portion of the Minutes of the September Federal Open Market Committee
meeting, released Wednesday, November 14:

Participants saw recent price developments as consistent with
inflation remaining at or below the Committee’s 2 percent objective over
the medium run. Although energy prices had risen sharply in recent
months, reflecting earlier increases in crude oil costs and supply
disruptions, gasoline prices were anticipated to move back down in
coming months as those pressures eased. Similarly, effects of the
drought were expected to show through to retail food prices over the
next few quarters but then subside. By various estimates, underlying
inflation trends remained subdued, and indicators of longer-term
inflation expectations were generally viewed as stable.

In their discussion of financial developments over the intermeeting
period, participants commented on the effects of the policy actions
taken at the September meeting to strengthen the Committee’s forward
guidance and to purchase additional MBS. The initial effects were
generally viewed as consistent with a marked easing in financial
conditions. For example, yields on MBS dropped noticeably, leading to a
decline in mortgage interest rates, and corporate bond yields generally
moved lower. Yields on nominal Treasury securities were little changed.
Some participants suggested that more time would be required to assess
the ultimate effects of the additional MBS purchases on primary mortgage
rates and on financial conditions more broadly. The stability in nominal
Treasury yields, paired with a decline in TIPS yields, implied a modest
increase in inflation compensation, on net, over the intermeeting
period. A couple of participants saw this increase as a sign that the
open-ended asset purchases posed a risk to the stability of longer-term
inflation expectations. However, others saw the effect on expected
inflation as relatively muted or likely the result of reduced risks of
undesirably low inflation. Participants remained concerned about risks
to financial markets associated with the situation in the euro area and
uncertain U.S. fiscal prospects, but a couple noted that measures of
financial market uncertainty were still relatively low. Several
participants pointed out that recent policy announcements by the
European Central Bank were received favorably in markets. A number of
participants mentioned other signs of greater optimism in financial
markets, including a rise in merger and acquisition activity and a
moderation in pressures on large U.S. financial institutions. A few
participants observed that low interest rates had increased demand for
riskier financial products, and a couple of participants saw a risk that
holding interest rates low for a prolonged period could lead to
financial imbalances and imprudent risk-taking. One participant,
however, commented that risk aversion still seemed quite high, citing
the very low yields on longer-term TIPS and a large estimated risk
premium in equity markets.

Participants also discussed the efficacy and potential costs of the
Committee’s asset purchases. A number of participants offered the
assessment that the Committee’s policy actions, to date, had been
effective in making financial conditions more accommodative and that
lower interest rates were providing support to aggregate spending, most
notably in areas such as housing, autos, and other consumer durables. In
particular, some pointed out that the favorable developments in mortgage
markets over the intermeeting period suggested that the MBS purchases
were likely to reinforce the nascent recovery in the housing market.
Several added that, based on the experience with earlier asset
purchases, the broader effects on economic activity from
more-accommodative financial conditions were likely to accrue over time.
Looking ahead, a number of participants indicated that additional asset
purchases would likely be appropriate next year after the conclusion of
the maturity extension program in order to achieve a substantial
improvement in the labor market. In that regard, a couple of
participants noted the likely usefulness of clarifying the range of
indicators that would be evaluated in assessing the outlook for the
labor market. Participants generally agreed that in determining the
appropriate size, pace, and composition of further purchases, they would
need to carefully assess the efficacy of asset purchases in fostering
stronger economic activity and consider the potential risks and costs of
such purchases. Several participants questioned the effectiveness of the
current purchases or whether a continuation of them would be warranted
if the recent moderate pace of economic recovery were sustained. In
addition, several participants expressed concerns that sizable asset
purchases might eventually have adverse consequences for the functioning
of asset markets or that they might complicate the Committee’s ability
to remove policy accommodation at the appropriate time and normalize the
size and composition of the Federal Reserve’s balance sheet. A couple of
participants noted that an extended period of policy accommodation posed
an upside risk to inflation.

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** MNI Washington Bureau: (202) 371-2121 **

[TOPICS: MMUFE$,MGU$$$,M$U$$$]