FOMC Minutes Show Some Dissension at Fed After S&P’s U.S. Debt Downgrade

All this turmoil led the Fed to depart from its standard language of recent months, a vague affirmation that economic conditions “are likely to warrant exceptionally low levels for the federal funds rate for an extended period.” Instead, on Aug. 9, the Fed for the first time allayed market fears by giving a specific date to their policy of monetary easing, saying that conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

The minimal word change in the Aug. 9 announcement came only after much debate within the FOMC—a fact that the minutes make clear. “Those viewing a shift toward more accommodative policy as appropriate generally agreed that a strengthening of the Committee’s forward guidance regarding the federal funds rate, by being more explicit about the period over which the Committee expected the federal funds rate to remain exceptionally low, would be a measured response to the deterioration in the outlook over the intermeeting period,” according to the minutes.

A few unnamed members felt that recent economic developments justified a more substantial move at this meeting, “but they were willing to accept the stronger forward guidance as a step in the direction of additional accommodation.”

Three members dissented against the mid-2013 language—Richard W. Fisher, Narayana Kocherlakota and Charles I. Plosser—“because they preferred to retain the forward guidance language employed in the June statement.”

One unnamed FOMC member expressed concern that the use of a specific date in the forward guidance “would be seen by the public as an unconditional commitment,” according to the minutes, “and it could undermine committee credibility if a change in timing subsequently became appropriate. Most members, however, agreed that stating a conditional expectation for the level of the federal funds rate through mid-2013 provided useful guidance to the public.”