Fed Minutes Reveal Balancing Act at the Fed
A few weeks after each Fed meeting, the minutes for that meeting are released. The minutes are not an actual transcript of what was said but a shamelessly doctored summary. As I tried to explain a couple weeks ago the Fed faces a continual trade off between inflation and economic growth. Here are some excerpts from Greg Ip’s Wall Street Journal Online article (subscription required) on the minutes from the last Fed meeting, which were released today, illustrating the Fed’s balancing act:
Many voting members ‘thought that the decision to keep policy unchanged at this meeting was a close call and noted that additional [increases] could well be neeeded,’ the minutes said. ‘But with economic growth having moderated some, most members anticipated that inflation pressures quite possibly would ease gradually over coming quarters…..’
That wording suggests the Fed saw a good chance rates won’t have to rise further, but officials didn’t want to foreclose the possibility. They wanted their postmeeting statement to ‘convey that inflation risks remained dominant’ and that the pause ‘did not necessarily mark the end of the tightening cycle,’ Moreover, they characterized the purpose of the pause as enabling them to ‘accumulate more information before judging’ whether further increases would be needed and ‘to limit the risk of tightening too much.’
A couple weeks ago I described their decision to pause this way:
In other words, what Ben Bernanke and the rest of the central bankers on the Federal Open Market Committee are thinking in deciding to pause is something along the lines of: ‘Okay, so hopefully by raising rates and cutting back on the growth in the money supply over the last couple of years we have avoided the destruction of the dollar and a massive inflation which would destroy the United States and the world economy. In the process, however, we’ve pushed housing to a dangerous precipice that could cause a recession. So let’s go the other way now, stop raising rates, and hopefully get a ’soft landing’ economically. Everybody cross your fingers.”
Emphasis on: “hopefully” and “Everybody cross your fingers”. In all seriousness, I think the Federal Open Market Committee does an excellent job of weighing all the issues and factors in deciding what to do but they are faced with an impossible task.