The Federal Reserve released the minutes of its March 17-18 meeting, revealing that the decisions to enter into swap agreements with foreign central banks and the decision to purchase longer-term Treasuries were both unanimous.
Both decisions have the potential to be highly inflationary, according to some observers, but the Fed seems to be more concerned with the nagging threat of deflation:
Participants saw little chance of a pickup in inflation over the near term, as rising unemployment and falling capacity utilization were holding down wages and prices and inflation expectations appeared subdued. Several expressed concern that inflation was likely to persist below desired levels, with a few pointing to the risk of deflation. Even without a continuation of outright price declines, falling expectations of inflation would raise the real rate of interest and thus increase the burden of debt and further restrain the economy.
While it seems that the decision to purchase longer-term securities on the open market was unanimous, there was some discussion over the amount of purchasing to be done and the type of securities to purchase:
Such purchases would provide further monetary stimulus to help address the very weak economic outlook and reduce the risk that inflation could persist for a time below rates that best foster longer-term economic growth and price stability. One member preferred to focus additional purchases on longer-term Treasury securities, whereas another member preferred to focus on agency MBS. However, both could support expanded purchases across a range of assets, and several members noted that working across a range of assets and instruments was appropriate when the effects of any one tactic were uncertain.
Interestingly, with the concern expressed over the expansion of the monetary base, there is no mention on its possible inflationary effects in the longer-term.
Members agreed that the monetary base was likely to grow significantly as a consequence of additional asset purchases; one, in particular, stressed that sustained increases in the monetary base were important to ensure that policy was consistently expansionary. Members expressed a range of views as to the preferred size of the increase in purchases.
They are clearly interested in growth at all costs, even if they are willing to call inflation growth. Further, the Fed is confident that it will be able to seize excess liquidity should inflation return with a vengeance, but one wonders whether the FOMC is nimble enough to staunch inflation in an environment where asset prices falter yet the cost of living increases.
Food for thought, but more on this later.