If there was any foreshadowing of the tenor of the January FOMC minutes this may have been done by Chairman Bernanke in his February 9 testimony before the House Budget Committee. He said, for instance:“While indicators of spending and production have been encouraging on balance, the job market has improved only slowly. Following the loss of about 8 ¾ million jobs from 2008 and 2009, private-sector employment expanded by a little more than 1 million in 2010. However, this gain was barely sufficient to accommodate the inflow of recent graduates and other new entrants to the labor forces and, therefore not enough to significantly erode the wide margin of slack that remains in our labor market…Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.”
“Nonetheless, overall inflation is still quite low and longer-term inflation expectations have remained stable…These downward trends in wage and price inflation are not surprising, given the substantial slack in the economy.”
“Although the growth rate of economic activity appears likely to pick up this year, the unemployment rate probably will remain elevated for some time. In addition, inflation is expected to persist below the levels that Federal Reserve policymakers have judged to be consistent over the longer-term with our statutory mandate to foster maximum employment and price stability. Under such conditions, the Federal Reserve would typically ease monetary policy by reducing its target for the federal funds rate.”
Comments by other Fed officials in the post meeting period have fallen on either side of the fault line that defines the doves and hawks on the committee, which has existed for quite some time. So the minutes will once again show divergent views on the future path of the economy and on the right approach for monetary policy in the months ahead. But I do not expect there will be any indication in the minutes that the Fed is about to enter the end game for this monetary policy experiment. The exit strategy has already been hammered out and is, in the mind of Bernanke, ready to be used when the time is right, but I don’t think there was any serious discussion at the meeting on the timing of implementing it. There may be a bit more confidence shown in the idea that the QE2 is the end of QE, but if I recall correctly there was also confidence a year ago that there was no need to attach a “1” to the quantitative easing program that was underway at that time.
One thing to check in the minutes is the Summary of Economic Projections, which they do four at four meetings a year, with January being one of those meetings. It is likely that they have revised up their outlook for growth and inflation, but it could be that the range of views on these indicators widened out again after narrowing a bit in November. The Fed’s outlook on prices and unemployment will be important at some point for gauging the timing of a change in policy, but I don’t think with PCE Core inflation, their favorite, at all time low in December, +0.7%, and the recent jobs data reports having been a jumble of mixed signals, that the time is right for their outlook to be a definitive sign of anything.
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