Fed Minutes Indicate Additional Stimulus Is Warranted Unless Economy Perks Up

For most investors, the release of the minutes from the latest FOMC meeting isn’t a reason to drop what they are doing and head to the newswires. The report is usually lengthy and filled with Fedspeak and thus, isn’t a great read. And since the markets have usually long since digested what the Fed had to say at their last meeting, there isn’t generally much of anything new contained in the minutes.

However, Wednesday’s release of the latest minutes certainly got the market’s attention. In short, the minutes suggested that Federal Reserve is likely to deliver another round of monetary stimulus (aka quantitative easing or “QE”) "fairly soon".

The key line contained in the minutes from the July 31-Aug. 1 meeting stated, "Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery."

According to Reuters, FOMC officials saw significant risks to an already weak U.S. economy, which grew at a sluggish 1.5% rate in the second quarter. The risks include a worsening of Europe's financial strains and the looming U.S. budget cuts and tax hikes, which have become commonly known as the fiscal cliff.

The minutes noted that there was a lively discussion on the costs and benefits of additional stimulus aimed at pushing longer-term interest rates.

"Participants also exchanged views on the likely benefits and costs of a new large-scale asset purchase program. Many participants expected that such a program could provide additional support for the economic recovery both by putting downward pressure on longer-term interest rates and by contributing to easier financial conditions more broadly. In addition, some participants noted that a new program might boost business and consumer confidence and reinforce the Committee’s commitment to making sustained progress toward its mandated objectives. Participants also discussed the merits of purchases of Treasury securities relative to agency MBS. "

However, there are clearly two sides to this debate. The minutes noted, “Others questioned the possible efficacy of such a program under present circumstances, and a couple suggested that the effects on economic activity might be transitory. In reviewing the costs that such a program might entail, some participants expressed concerns about the effects of additional asset purchases on trading conditions in markets related to Treasury securities and agency MBS, but others agreed with the staff’s analysis showing substantial capacity for additional purchases without disrupting market functioning. Several worried that additional purchases might alter the process of normalizing the Federal Reserve’s balance sheet when the time came to begin removing accommodation.”

Although there is an awful lot of Fedspeak to swallow in the minutes, the bottom line is the report gave the markets an indication that QE3 was back on the table. And as a result, stocks rallied up from the lows of the day to finish the session mixed.

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