Highlights Of FOMC Meeting Minutes June 20, 2012 Suggest More QE3 Likely:
Contrary to most analysts we heard today, the Fed nowhere suggested QE3 was off the table and our analysis of the minutes from the June 20 FOMC meeting show the Fed still has room to ease more as they acknowledged inflation was low. Traders may have been caught off guard when the FOMC expanded ‘Operation Twist’ by not looking carefully at what the Fed considers the most important economic data – employment and inflation.
The Fed sees low inflation risk and although housing as well as auto sales have made a comeback, this can’t be sustained at the current rate of jobs growth and the Fed’s mandate is to steady employment growth. The Fed meeting minutes are not expected to state “QE3 coming this Friday” but looking carefully at what concerns the Fed – unemployment, it’s possible they may move inter-meeting. Keep in mind, these Fed minutes came out before the lackluster jobs report last Friday that showed a meager 80,000 new jobs created. Most paragraphs in the meeting minutes released today began with a negative spin.
Highlights Of The Fed Meeting Minutes June 20, Released July 11, 2011:
The information reviewed at the June 19-20 meeting suggested that economic activity was expanding at a somewhat more modest pace than earlier in the year. Improvements in labor market conditions slowed in recent months, and the unemployment rate remained elevated. Consumer price inflation declined, primarily reflecting reductions in the prices of crude oil and gasoline, and measures of long-run inflation expectations continued to be stable.
The unemployment rate stood at 8.2 percent in May, essentially the same as its average in the first quarter. The rate of long-duration unemployment remained very high, and the share of workers employed part time for economic reasons was little changed in recent months
In recent months, the output of motor vehicles and parts increased further, on balance, although at a slower rate than in the first quarter, while factory output outside of the motor vehicle sector only inched up.
Real personal consumption expenditures increased solidly in the first quarter. In April and May, however, nominal retail sales excluding purchases of motor vehicles declined while sales of motor vehicles slowed from their brisk pace in the first quarter. Factors that tend to support households’ expenditures were, on balance, a little softer in recent months. The estimated level of households’ real disposable income was revised down for the fourth quarter of last year.
Activity in the housing sector generally improved in recent months, but it was still restrained by tight credit standards for mortgage loans and the substantial inventory of foreclosed and distressed properties
Real business expenditures on equipment and software increased moderately in the first quarter. In April, nominal shipments and orders of nondefense capital goods excluding aircraft decreased.
Real federal government purchases fell markedly in the first quarter, led by a sharp decrease in defense spending. Data for federal government spending in April and May pointed to a slower pace of decline in defense
Recent indicators suggested that overall foreign economic activity was expanding at a below-trend pace in the second quarter.
Growing concerns about developments in the euro area and weaker-than-expected economic data in the United States and abroad both weighed on financial markets since the time of the April FOMC meeting. The deterioration in investor sentiment was tempered to an extent by market participants’ expectations for further policy accommodation by central banks as well as by the anticipation of additional measures to address European fiscal and banking issues.
Broad U.S. stock price indexes declined, and option- implied volatility on the S&P 500 index rose. Equity prices for large domestic banks significantly underperformed the broad indexes amid uncertainty about the situation in Europe and the outlook for the global economy. Disclosure of a large trading loss at a majorU.S. bank also contributed to the underperformance.
Credit conditions in residential mortgage markets continued to be tight. Mortgage refinancing activity rose in April and May but remained subdued despite further declines in mortgage rates to historically low levels. Consumer credit expanded at a solid pace in recent months, as increases in student loans boosted nonrevolving credit while revolving credit was about flat.
Heightened financial strains in the euro area and indications of a weaker pace of global economic activity weighed on foreign financial markets during the inter- meeting period. Yields on most euro-area peripheral countries’ sovereign debt rose, particularly after the May 6 elections in Greece failed to produce a new government. In addition, indicators of the conditions of European banks continued to deteriorate: Rating agencies downgraded major banks in Germany, Italy, Spain, and several other European countries; prices of euro- area bank stocks fell sharply; and credit default swap premiums for many euro-area banks increased.
Although equity prices in many countries rallied modestly late in the intermeeting period, global equity prices declined, on balance, over the period, with especially large net decreases in Japan and many emerging market economies.
In the economic projection prepared by the staff for the June FOMC meeting, the forecast for real gross domestic product (GDP) growth in the near term was revised down.
These are just a few highlights of the meeting minutes that can be read here -http://www.federalreserve.gov/monetarypolicy/fomcminutes20120620.htm
We would largely consider this to be the most negative the FOMC has been all year which increases the chances of more QE3.
