Fly on the Wall at the Fed — What They’re Thinking

Analysis of FOMC minutes shows Fed's challenges

• We got a glimpse into the degree of support for Operation Twist: ”Two members said that current conditions and the outlook could justify stronger policy action, but they supported undertaking the maturity extension program at this meeting, as it did not rule out additional steps at future meetings. Three members [obviously Federal Reserve Bank of Dallas president Richard Fisher, FRB of Minneapolis president Narayana Kocherlakota and FRB of Philadelphia president Charles Plosser] concluded that additional accommodation was not appropriate at this time.” Presumably everybody else, both voters and nonvoters alike, was supportive of the policy.
• As for the three dissenters, Kocherlakota stuck to his August dissent rationale, which was that no easing at all was warranted, while Fisher and Plosser believed that twisting would not be effective and could have negative consequences. Fisher argued that the FOMC ”should instead focus their attention on improving the monetary policy transmission mechanism, particularly with regard to the activity of community banks, which are vital to small-business lending and job creation.” This suggests he might be the least hawkish of the three.

Bottom line

This Fed team has been the most accommodating in history, and it is still scrambling for more ways to provide monetary tools to forestall deflation and recession. Nice to see that the FOMC members are on the case, but frankly it’s doubtful that they will act soon enough, or powerfully enough, to forestall the downshifting of the business cycle and, with it, deeper unemployment and erosion of home prices.