FOMC Minutes… The QE2 Exit Strategy Discussions Have Started

The minutes from the latest FOMC meeting on April 26 to 27, 2011 have been released.  The key takeaway here is that the FOMC has admitted that it has started real discussions on how to gradually unwind the quantitative easing measures.  The first move is to let the balance sheet shrink as the first step toward monetary easing.  The result was the FOMC will not execute the plan until it is sure that the economy can handle it.

It looks as though the gradual exit is more in line with reality than a sudden or rapid unwinding of the quantitative easing.  As noted earlier, the mortgage-backed securities will be first to be allowed to mature without reinvesting  and then ultimately the %1.5 trillion in Treasury debt securities wind down via maturities.

What is interesting is that the members prefer to sell agency securities until after it the start of rate hikes and only at a gradual sale rate.

The current minutes also show an increased expectation for inflation, but the minutes are still indicating what Benrnake would call “transitory” as the increase is expected to be temporary.

The FOMC also noted that economic activity expanded only at a moderate pace in recent months and noted that labor market conditions still continued to improve gradually. Another note remains weak on housing as “Activity in the housing market remained very weak, as the large overhang of foreclosed and distressed properties continued to restrain new construction.”

Frankly, we already had a news conference for the first time right after the FOMC meeting.  If you want to go through yet a third review of the last FOMC meeting. you can read the full minutes here.

JON C. OGG