During the Fed Reserve's last meeting to set policy on Sept. 21, talk centered on whether the economy would need more bolstering, according to the FOMC minutes released Tuesday. The possibility of buying more longer-term Treasuries and ways to manage the public’s expectations regarding future higher levels of inflation were chief among them.
In the quest to manage the public’s attitude toward inflation, policymakers debated whether to release more detailed information about preferred rates of inflation, or how much inflation would be tolerated for a fixed period of time (also known as price-level targeting). According to the minutes, “As a general matter, participants felt that any needed policy accommodation would be most effective if enacted within a framework that was clearly communicated to the public.”
With regard to the potential need for additional stimulus, several members, according to the minutes, “unless the pace of economic recovery strengthened or underlying inflation moved back toward a level consistent with the Committee’s mandate, they would consider it appropriate to take action soon.” There was obvious dissatisfaction with the progress of the economy, with a reluctance to take any action that might not have the desired effects.
Ahead of the release of the minutes, John Lekas, CEO of Leader Capital, commented: “Everyone assumes the Fed will continue buying Treasuries, but with the 10-year at 2.37% there is reason to think they may take a breather. The U.S. dollar could strengthen on any comments to that effect, alleviating the inflationary and political risk of it falling so quickly. They’ve already allowed for a healthy dent in corporate, government and mortgage reissuance at low rates. It is important to know when to quit before you reach a point of diminishing returns.”
After the release, Lekas said: “I think the bond market’s selling off on the news; I think you’ll see the dollar rally, and I think the politics from our foreign allies are much stronger than the headlines, meaning that there’s a lot of pressure on the Fed to back off and not knock down the dollar.”
Pressure on the dollar at the expense of U.S. allies, he added, “is not going to do it, and I think you’ll see the dollar move up from here.”
Both the Dow and the S&P 500 closed slightly higher when the market digested the FOMC’s minutes.