Minutes of August FOMC Meeting – Comfortable on the Sidelines, For Now
The minutes of the August 11-12 FOMC meeting included discussions about the exit strategy, asset purchases, and the likely course of the economy. The minutes noted that the staff discussed tools to reduce the extraordinary monetary accommodation in place, which include reverse repurchase agreements, a term deposit facility for depository institutions to enable a reduction of excess reserves and steps to “tighten the link between the interest paid on reserve balances held at the Federal Reserve and the federal funds rate.”
The pros and cons of including adjustable rate mortgages in the asset purchase program were discussed but a decision was not made. The Fed has purchased $276 billion dollars or 92% of the program’s target of $300 billion purchases of Treasury securities. It was also noted that a gradual reduction of the volume of purchases of agency debt, mortgage backed securities would be necessary.
The FOMC held a range of views about the future course of the economy. Consumer spending and credit conditions appeared to be at the top of the list. The high level of household debt, tight credit conditions, reduced wealth, and uncertain job prospects were seen as factors that will play a role in holding back consumer spending. The results of the latest Senior Loan Officers’ Survey indicate that loan underwriting standards remain tight. The possibility of additional credit losses looms large for banks and problems with commercial real estate loans have placed several banks in a vulnerable position, both of which lead to expectations of tight credit conditions. The concern about commercial real estate was summarized as follows: “Commercial real estate activity was being weighed down by deteriorating fundamentals, including declining occupancy and rental rates; by falling prices; and by difficulty in refinancing loans on existing properties.” The inflation picture was presented to be benign in the next few years, while a few saw “a substantial risk of disinflation.” In sum, there were essentially no surprises of any sort in the minutes.
