Fed Minutes Show Growing Divide, Gold Holds Gains

The release of the Fed minutes this afternoon revealed a growing divide among
Chairman Ben Bernanke and his fellow U.S. central bankers over the proper course
of monetary policy. The Fed minutes a recap of the Federal Open Market
Committee (FOMC) meeting showed that at the most recent August 9th meeting,
several members were in favor of further stimulus while others were concerned
that additional rounds of quantitative easing could ignite inflation. Gold
futures maintained their gains following release of the Fed minutes, remaining
higher by $45.30 at $1,836.90 per ounce. The two most critical paragraphs from
the Fed minutes are below: Participants discussed the range of policy tools
available to promote a stronger economic recovery should the Committee judge
that providing additional monetary accommodation was warranted. Reinforcing the
Committees forward guidance about the likely path of monetary policy was seen as
a possible way to reduce interest rates and provide greater support to the
economic expansion; a few participants emphasized that guidance focusing solely
on the state of the economy would be preferable to guidance that named specific
spans of time or calendar dates. Some participants noted that additional asset
purchases could be used to provide more accommodation by lowering longer-term
interest rates. Others suggested that increasing the average maturity of the
Systems portfolioperhaps by selling securities with relatively short remaining
maturities and purchasing securities with relatively long remaining
maturitiescould have a similar effect on longer-term interest rates. Such an
approach would not boost the size of the Federal Reserves balance sheet and the
quantity of reserve balances. A few participants noted that a reduction in the
interest rate paid on excess reserve balances could also be helpful in easing
financial conditions. In contrast, some participants judged that none of the
tools available to the Committee would likely do much to promote a faster
economic recovery, either because the headwinds that the economy faced would
unwind only gradually and that process could not be accelerated with monetary
policy or because recent events had significantly lowered the path of potential
output. Consequently, these participants thought that providing additional
stimulus at this time would risk boosting inflation without providing a
significant gain in output or employment. Participants noted that devoting
additional time to discussion of the possible costs and benefits of various
potential tools would be useful, and they agreed that the September meeting
should be extended to two days in order to provide more time. In the discussion
of monetary policy for the period ahead, most members agreed that the economic
outlook had deteriorated by enough to warrant a Committee response at this
meeting. While all felt that monetary policy could not completely address the
various strains on the economy, most members thought that it could contribute
importantly to better outcomes in terms of the Committees dual mandate of
maximum employment and price stability. In particular, some members expressed
the view that additional accommodation was warranted because they expected the
unemployment rate to remain well above, and inflation to be at or below, levels
consistent with the Committees mandate. Those viewing a shift toward more
accommodative policy as appropriate generally agreed that a strengthening of the
Committees forward guidance regarding the federal funds rate, by being more
explicit about the period over which the Committee expected the federal funds
rate to remain exceptionally low, would be a measured response to the
deterioration in the outlook over the intermeeting period. A few members felt
that recent economic developments justified a more substantial move at this
meeting, but they were willing to accept the stronger forward guidance as a step
in the direction of additional accommodation. Three members dissented because
they preferred to retain the forward guidance language employed in the June
statement. The full Fed minutes are available at the Federal Reserves website:
http://www.federalreserve.gov/monetarypolicy/fomcminutes20110809.htm