Tuesday, November 24, 2009

In Fed Minutes, Worries About Low Rates’ Effects

WASHINGTON (Reuters) — Federal Reserve officials are increasingly confident that the American economic recovery is sustainable, but they do not see employment picking up soon, according to minutes from their November meeting released on Tuesday.

What a time to be unemployed, never a pleasant experience.

Policymakers also expressed concern about possible adverse repercussions from their vow to keep interest rates low for an extended period, including unwanted speculation in financial markets. “Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates,” the central bank reported in the minutes.

Gold is over $1,100 an ounce, driven by inflation fears of gold bugs.

Some investors and policymakers have argued that the Fed’s policy of rock-bottom borrowing costs may be driving investors to beef up their bets by using the falling dollar to fund their trades. President Barack Obama, during a recent visit to Asia, was lectured on the subject by top government officials in China.

The Federal Reserve Open Market Committee, the central bank’s policy-setting body, did not believe such speculative activity had taken place to date, contending that the dollar’s decline had thus far been “orderly.”

What else they gonna say?

“Any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching,” the minutes said. The dollar dropped to a 15-month low against a basket of major currencies last week. For now, the minutes indicated policymakers are not widely concerned about inflation in the medium term. This was already evident from a string of recent speeches in which even the hawkish regional presidents of the Dallas and Philadelphia Feds have expressed dovish views on the prospects for a sustained rise in consumer prices.

Hawks being dovish.

The “central tendency” forecasts of policymakers were slightly more sanguine on the economy’s prospects but not dramatically so. Gross domestic product was expected to shrink substantially less this year than previously estimated. Similarly, the jobless rate, currently at a 26-year high of 10.2 percent, was now expected to come down more quickly than policymakers believed back in June. “Most participants now view the risks to their growth forecasts as being roughly balanced rather than tilted to the downside,” the minutes said.

There's American English, Elizabethan English, and policy-speak.

Nonetheless, there was a sense that any turnaround in the labor market would not happen quickly enough to stem the rising tide of joblessness. “The weakness in labor market conditions remained an important concern,” the minutes said. “The considerable decelerations in wages and unit labor costs this year were cited as factors putting downward pressure on inflation.”

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