+DJ Minutes: FOMC Might Have Cut Rate In May But For War Fog
*DJ FOMC Minutes: Econ Slack To Persist Even If GDP Picks Up
*DJ FOMC Minutes: Rebound In Business Spending Not Imminent
DJ FOMC Minutes -2: `Not Enough Time' Elapsed Since War End
WASHINGTON (Dow Jones)--The Federal Reserve's top policymakers deemed the U.S. economy weak enough to warrant an interest-rate cut six weeks ago but chose to postpone the move until this week because they thought the economic outlook was clouded by the war in Iraq, minutes of their deliberations show.
The minutes, released by the central bank Thursday, show that members of the Fed's policymaking Open Market Committee thought that the economy had accumulated "a considerable amount of unused resources" in the labor and manufacturing sectors - the result of a two-and-a-half-year economic downturn. That slack would persist at "elevated" levels even if economic growth accelerated as expected later in the year, they said.
At their meeting on May 6, "the members acknowledged that a case could be made for easing policy immediately in light of the generally disappointing reports on the recent performance of the econmy, the ongoing disinflation trend in a period of already low inflation, and forecasts of persisting excess capacity," the minutes say. But they decided it would be wise to wait another six weeks to see whether the trend changed.
"They concluded that, on balance, that not enough time had elapsed since the end of the Iraqi war to sort out the underlying forces at work in the economy," the minutes say. The FOMC meeting occurred just five days after President George W. Bush announced that major combat operations in Iraq had ended.
Although all of the FOMC's 12 voting members agreed with that decision, some were worried. "Some members cautioned that persisting uncertainty regarding economic trends should not provide a basis for prolonged inaction in light of the risks of further disinflation and subpar economic growth," the minutes say. "In the absence of convincing indications of an appreciable pickup in economic growth, an easing move might be desirable in the near term, perhaps at the June meeting.
Those indications did not arrive, and the FOMC opted Wednesday to cut its key Federal funds rate a quarter percentage point to 1%, the lowest level since 1958. The rate cut was the 13th since the economic downturn began in January 2001, and the first since November. The Fed also said it will keep interest rates low "for the forseeable future," even though forecasters expect economic growth to accelerate sharply in coming months.
The minutes of the May meeting shed some light on why the central bank thinks it would be wise to keep interest rates low. Although the rebound in stock prices provide a "source of potential impetus going forward," the FOMC said it hadn't seen "firm indications of significant acceleration in consumer spending." The outlook for business spending, moreover, was less than satisfactory: the committee said the "upturn in (business) confidence was not likely to show through to investment outlays for some time.
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06-26-03 1405ET
DJ FOMC Minutes -3: Unease Over Communications-Policy Change
"Even assuming a pickup in the expansion of economic activity in line with current forecasts for this year and next, excess capacity in labor and product markets would remain elevated and might well foster disinflation over coming quarters," the committee concluded, according to the minutes. "Given the pressure of a considerable amount of unused resources, any adverse developments that held down economic expansion would increase the probability of further disinflation."
Although the broadest measures of U.S. prices show the inflation rate has declined steadily this year, the FOMC members said the risk of outright deflation was remote. But they indicated at their May meeting that they are not inclined to let the rate fall much further, echoing the worry of some commentators that the economy now is "just one recession away from deflation."
"Members commented that substantial additional disinflation would be unwelcome because of the likely negative effects on economic activity and the functioning of financial institutions and markets, and the increased difficulty of conducting an effective monetary policy, at least potentially in the event the economy was subjected to adverse shocks," the minutes say.
The minutes also show that some FOMC members were troubled by the committee's decision last month to jettison a three-year-old strategy for communicating its views on the economic outlook. At its meeting on May 6, the FOMC replaced a simple statement of the "balance of risks" - measuring the risk of economic weakness against the risk of inflation - with a more complex statement that weighed the risk of inflation and the risk of economic weakness independently of each other.
On the whole, the committee agreed that the old format had grown obsolete in a time when deflation - not inflation - was becoming a threat to the economy. Still "there was some concern" that the new format "might be mistakenly interpreted as an indication of committee concern about the outlook for economic activity rather than a judgment about the relative odds on further inflation," the minutes say.
Two members, in any case, said they would have preferred to stick with the old format and retain the assessment that the Fed adopted last November that the risk of inflation was equal to the risk of economic weakness. Those members "saw merit in adopting a balanced risks assessment at this meeting despite the evident shortcomings in present circumstances of the form of such statements in use in recent years," the minutes say.
The minutes did not identify the two FOMC members. |
