Minutes released Tuesday from the controversial Aug. 9 meeting of Federal Reserve policy makers show that they were fully aware of the volatile global markets and issues surrounding the Standard & Poor’s downgrade of U.S. debt when they announced that they will keep interest rates low through mid-2013.
A few unnamed Fed policy makers were opposed to being so specific in naming a date for keeping rates low, but Fed Chairman Ben Bernanke (left) was not among the dissenters.
The Federal Open Market Committee minutes show the Fed policy makers believed their decisions at the June FOMC meeting “were about in line with market expectations and elicited little market reaction.” In June, the Fed announced it would complete on June 30 its second round of “quantitative easing,” or Treasury asset purchases, and keep the target range for the federal funds rate at 0% to 0.25%.
However, according to the Aug. 9 meeting minutes, between June and August, “investors marked down the expected path for the federal funds rate substantially, reflecting incoming economic data that were weaker than expected and concomitant concerns about the prospects for global growth.”
Yields on nominal Treasury securities fell “notably” during the summer period, the FOMC minutes acknowledge, adding that later, “investor focus appeared to turn to the U.S. debt ceiling and the potential for delayed debt service payments by the Treasury Department, the possibility of a downgrade of U.S. sovereign debt, and the prospects for significant long-term fiscal consolidation.”
Further, the minutes acknowledge that although market turmoil eased after legislation to raise the debt ceiling and cut the budget was signed into law on Aug. 2, U.S. equity prices in the last week of July and the first week of August fell considerably, reflecting weaker-than-expected economic data releases and the Aug. 5 announcement by Standard & Poor’s of its downgrade of long-term U.S. sovereign debt.