Cautious Policymakers Did Not Rule Out Further Asset Purchases

Although the Fed upgraded forecasts of 4Q09 and 2010 growth outlook, the minutes revealed that policymakers remained concerned about the vulnerability of recovery and the impacts may be caused by removal of stimulus.

In fact, the members' views on the economy had little change from the November even though economic data released during the period showed improvements in various aspects. In the minutes, the Fed did show much excitement about the better-than-expected employment figures (November) released a week before the meeting. While acknowledging 'decline in private payrolls in October and November was much smaller than in the third quarter', 'the length of the average workweek for production and nonsupervisory workers increased in November', 'aggregate hours worked registered the first substantial increase since the recession began' and 'the unemployment rate dropped in November', the Fed emphasized that the jobless rate remained 'quite high, while the labor force participation rate continued to decrease'. Moreover, the Fed cited other indicators showing weakness in the labor market which include the employment-to-population ratio which had fallen to a 25-year low and aggregate hours of production workers which had dropped more than during the 1981-82 recession.

Regarding withdrawal of policy supports, some members expressed their worries about the economy's ability to generate a self-sustaining recovery without government support. For instance, the housing sector might be undercut next year as the Fed's purchases of MBS wind down, the homebuyer tax credits expire, and foreclosures and distress sales continue.

While announcing the asset purchase programs will end by 1Q10, the Fed did not rule out the possibility of increasing and extending the program should economy weaken. A few members noted that 'resource slack was expected to diminish only slowly and observed that it might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the Committee's large-scale asset purchases and continuing them beyond the first quarter, especially if the outlook for economic growth were to weaken or if mortgage market functioning were to deteriorate'.

Moreover, to keep inflation expectations anchored, 'all participants agreed that monetary policy would need to be responsive to any significant improvement or worsening in the economic outlook and that the Federal Reserve would need to continue to clearly communicate its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and pace'.

The dollar weakens against major currencies and short-term Treasury rose after the minutes as there were reduced speculations about an early Fed rate hike.