Will the Federal Reserve Ease Their Yearly Projections?

Jun 14
11:00

2012

Shelby McCarthy

Shelby McCarthy

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At the same time, while most members were forecasting high levels of resource use and little change in the rate of inflation this year, they saw only ...

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At the same time,Will the Federal Reserve Ease Their Yearly Projections? Articles while most members were forecasting high levels of resource use and little change in the rate of inflation this year, they saw only a very limited risk that a slight easing move might foster higher inflation under prevailing circumstances, and some felt that there were favorable prospects for a slightly improved inflation performance.

Under the circumstances, a slight decrease was warranted in the real federal funds rate from a level that a number of members considered still a bit to the firm side--a stance that seemed less appropriate in light of the reduced threat over the last year of a pickup in inflation. One member pointed out that such a decrease would tend to counter the effects on aggregate demand of the recent rise in the foreign exchange value of the dollar, which might continue to move higher if interest rate declines expected by the markets were not forthcoming. It was noted that postponing a decision in this uncertain economic climate could be defended on the ground that more evidence was needed to ascertain whether the weakness in the economy was quite temporary or more lasting; if it was the former, inflationary pressures could re-emerge at lower interest rates.

On the other hand, a few members commented that the currently sluggish performance of the economy could be read as calling for a more pronounced easing move, but they preferred a cautious approach to policy in light of current inflation trends and the uncertainties that surrounded their forecasts of some strengthening in the economy.

The Chairman informed the Committee that he had asked the members of the Board of Governors to convene immediately after this meeting to consider a reduction of 1/4 percentage point in the discount rate. Such a reduction had been proposed by a total of six Federal Reserve Banks at this point. Given the easing in reserve markets favored by the Committee and the possibility of a lower discount rate, the members did not believe that a further policy move was likely to be needed during the intermeeting period. Accordingly, they favored an unbiased directive that did not incorporate a presumption about the likely direction of any adjustments to policy during the next several weeks. In keeping with its usual practice, the Committee did not rule out the possibility of an intermeeting policy change on the basis of unanticipated economic or financial developments.

At the conclusion of the Committee's discussion, all the members supported a directive that called for a slight reduction in the degree of pressure on reserve positions and that did not include a bias about the likely direction of an adjustment to policy during the intermeeting period, should unanticipated developments warrant a change in policy. Accordingly, the Committee decided that in the context of its long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, slightly greater or slightly lesser reserve restraint would be acceptable during the intermeeting period. The reserve conditions contemplated at this meeting were expected to be consistent with moderate growth in M2 and M3 over coming months.

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