FOMC Minutes Indicate Investment Bias

So far it has only been Kansas City Fed President Hoenig who has dissented against the policy of no or low rates.  There may not be a direct change on that stance, but some policy issues are becoming evident of at least some change.  While no formal opposition has emerged, the only choice of adding liquidity and lowering rates now seems to be through asset purchases.

The reinvesting of MBS proceeds back into Treasuries was to signal steady policy with no rate bias change.  This was to eliminate the effect of a virtual tightening of credit even without a rate change.  The ‘extended period’ argument… There is at least some indication that the Fed could invest in mortgages again down the road.

There is also the observation of a slowing of growth and an intent to keep that growth higher.  Unfortunately, that may be harder than expected.  The minutes from the August 10 meeting indicated that the pace of the economic recovery slowed in recent months and that inflation remained subdued. In addition, revised data for 2007 through 2009 from the Bureau of Economic Analysis showed that the recent recession was deeper than previously thought.

“Business investment in equipment and software had grown at a robust pace, but growth in new orders for non-defense capital goods, though volatile from month to month, appeared to have stepped down.”  The FOMC members were still somewhat mixed on housing, likely due to the fact that housing data is not as current as other concurrent indicators.

The FOMC staff lowered its projection for the increase in real economic activity during the second half of 2010 but continued to anticipate a moderate strengthening of the expansion in 2011. The softer tone of incoming economic data suggested that the pace of the expansion would be slower over the near term than previously projected.

Overall inflation was projected to remain subdued over the next year and a half. The staff’s forecasts for headline and core inflation in 2010 were revised up slightly in response to the higher prices of oil and other commodities and the depreciation of the dollar. Even so, the wide margin of economic slack was projected to contribute to some slowing in core inflation in 2011, though the extent of that slowing would be tempered by stable inflation expectations.

Frankly, reading this data offered no great new insight.  It was about as rewarding as reading Sunday’s newspaper on Wednesday.  The FULL MINUTES ARE HERE.

When the FOMC minutes matter too much to the markets this long after the fact, there is a real indication that too many market participants are hanging on too tightly to every single bit of data.  Unfortunately, that describes August-2010.  To prove the point, stocks have fallen marginally since the minutes were released.

JON C. OGG