In response to the FOMC’s concern with the lackluster economic recovery and the mostly benign outlook on inflation (some were more concerned about inflation), members on Aug 9th discussed doing more. They discussed selling short term maturity debt they own and buying longer term debt with the proceeds. They talked about lowering the interest rate paid on bank reserves to encourage bank lending (.25% rate is certainly no impediment) and they debated the only thing they followed thru on, that of explicitly defining the time frame of an ‘exceptionally low’ fed funds rate. The 1st and 3rd options were meant to lower further the level of long term interest rates as many on the committee still believe that even lower rates will somehow help. Some didn’t want more because they didn’t think it “would likely do much to promote a faster economic recovery” and “that providing additional stimulus at this time would risk boosting inflation without providing a significant gain in output or employment.” The majority of members “agreed that the economic outlook had deteriorated by enough to warrant a Committee response at this meeting.” Remember that this is only 5 weeks after the end of QE2 that they felt the need to act again. Some members even wanted more and will likely use the Sept meeting to push for it. Bottom line, after hearing from Bernanke on Friday, Evans and Kocherlakota today and Fisher and Plosser (dissenters) after Aug 9th, we got a good read of what the Fed is thinking and it seems that the majority still want more.
