November 23, 2010

At FOMC November Meeting, Inflation Seen as ‘Subdued’ and Housing Market Activity as ‘Exceptionally Weak’

Minutes of the meeting indicate frustration at slow recovery but low probability of a double-dip recession

The Federal Reserve released the minutes of the Federal Open Market Committee’s (FOMC’s) November 2-3 meeting Tuesday.

The minutes indicated that the New York Fed reinvested $65 billion of principal payments from the System Open Market Account (SOMA’s) “holdings of agency debt and agency- guaranteed mortgage-backed securities (MBS),” into longer-term Treasury securities, mostly in 2- to 10-year maturities—including some TIPS—as part of an initiative announced in August. The FOMC minutes note that the Treasury estimates that it could reinvest about $75 billion a month in this way without disrupting the market.

The Economy

As for the economy, the report noted that, “economic recovery proceeded at a modest rate in recent months, with only a gradual improvement in labor market conditions, and was accompanied by a continued low rate of inflation.” There were “gains” in “consumer spending, business investment in equipment and software, and exports,” but construction—both residential and commercial—was still “depressed.”

The report also said, “U.S. industrial production slowed noticeably in August and September, hiring at private businesses remained modest, and the unemployment rate stayed elevated.”

Headline inflations was “subdued” and “core consumer price inflation trended lower.”

“Real personal consumption expenditures (PCE) rose” moderately—attributed to “rising equity prices,” in the stock market, but “real disposable income” was up “only slightly in the third quarter,” after jumping in the first half of the year, and the savings rate dropped, though it is still high, as it has been since 2008, the report indicated.

“Activity in the housing market remained exceptionally weak,” even though mortgage rates are low, and the Fed attributed this to “consumer pessimism about the outlook for jobs and income, the depressed rate of household formation, and tight underwriting standards for mortgages.”

The Outlook

Growth is being restrained by lack of confidence and concerns over “the durability of the economic recovery, continuing uncertainty about the future tax and regulatory environment, still-weak financial conditions of some households and small businesses, the depressed housing market, and waning fiscal stimulus.”

The FOMC reports frustration at “disappointingly slow” job growth and price stability—the Fed’s two main mandates. They said a double-dip recession was “quite unlikely” but tempered that saying that conditions left the “economic expansion vulnerable to negative shocks.”

The 2010 change in the GDP is reported to be 2.4% to 2.5%, down from the June projection of 3.0% to 3.5%; and for 2011, 3.0% to 3.6%, down from the June projection of 3.5% to 4.2%.

The unemployment projections are higher than in June, for 2010 at 9.5% to 9.7%, up from 9.2% to 9.5% ion June; and for 2011 the projection is 8.9% to 9.1%, up from a projected 8.3% to 8.7% in June.

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