FT: October interim FOMC committee meeting

At the October 15 meeting, held by video conference, the Fed discussed whether it should target a long-term interest rate, suggesting this could be an option if inflation continued to fall in the face of the central bank’s new $600bn round of quantitative easing, nicknamed QE2. But the meeting rejected the policy change.
EDITOR’S CHOICE

Targeting a long-term interest rate – fixing the 10-year yield at 2.5 per cent, for example – would commit the Fed to buying an unlimited amount of Treasury securities if the public wanted to sell them at that price. At the moment, the Fed can choose to buy more or less than $600bn, but with a long-term rate target it might lose control of the size of its balance sheet...



FOMC members slashed their growth and inflation forecasts for the next few years and sharply increased their expectations of unemployment.

In a crucial argument supporting the case for QE2, most of the FOMC forecast that core inflation in 2013 will be between 1.1 and 2 per cent. That justifies action because he Fed’s objective is ‘about 2 per cent or a bit below’.

The committee also expects to miss its other goal on jobs with unemployment forecast to be between 7.7 and 8.2 per cent at the end of 2012 – up from a June forecast of 7.1 to 7.5 per cent – and 6.9 to 7.4 per cent at the end of 2013.

A few committee members also increased their estimate of the number of people who will remain out of work once the economy has fully recovered.

The ‘central tendency’ estimate – which excludes the three highest and three lowest forecasts by individual FOMC members – rose from between 5 and 5.3 per cent to between 5 and 6 per cent.

Most FOMC members now expect growth of between 3 and 3.6 per cent in 2011 compared with the 3.5 to 4.2 per cent that they forecast in June, but they remain optimistic that growth will accelerate to about 4 per cent in 2012.