Wednesday, January 6, 2010

Federal Reserve members don't all agree as to future stimulus

Today the Federal Reserve released minutes of the meeting of the open market committee held December 15-16, 2009. It was interesting to note in these minutes that "a few members" were concerned about planned withdrawal of stimulus via ending purchases of securities related to the mortgage market and "observed that it might become desirable at some point in the future to provide more policy stimulus". Contrast this with somewhat the opposite view held by "one member" who "thought that the improvement in financial market conditions and the economic outlook suggested that the quantity of planned asset purchases could be scaled back, and that it might become appropriate to begin reducing the Federal Reserve's holdings of longer-term assets".

We have written before how challenging it will be for government policy makers to determine how and when to remove stimulus. The Federal Reserve minutes just demonstrate that there are a variety of opinions even among those key policy makers on how to proceed. Getting this just right will be almost impossible. We continue to be of the opinion that the U.S. government will err on the side of overstaying stimulus, thus laying the groundwork for future inflation; however, this all remains to be seen. The potential for some type of policy mistake would seem to be quite high.