FOMC

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The FOMC continues to worry about the economy, rather than inflation, according to the minutes of the Dec. 15-16 meeting. In a surprise, some members said more stimulus "might become desirable." The other takeaway is that although they expect a recovery, it will be slow and shallow. They see growth strengthening over the next two years but a "rather slow" rise in output (GDP) and employment. The dollar sold off on this, as it should. The two most important passages from the Minutes are here:

“A few members noted that resource slack was expected to diminish only slowly and observed that it might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the Committee’s large-scale asset purchases and continuing them beyond the first quarter, especially if the outlook for economic growth were to weaken or if mortgage market functioning were to deteriorate.”

This is the passage likely to generate the headlines but the content is somewhat less eye-catching than the headline. For sure, this is a USD negative, as it pushes even the outlook for withdrawing quantitative easing deeper into 2010. But this assessment largely rests on the continuing outlook, which even since the meeting in mid-December, has improved. The takeaway is that some members of the FOMC are a long ways from hiking rates.

And:

“Overall, many participants viewed the risks to their inflation outlooks as being roughly balanced. Some saw inflation risks as tilted to the downside, reflecting the quite elevated level of economic slack and the possibility that inflation expectations could begin to decline in response to the low level of actual inflation. But others felt that inflation risks were tilted to the upside, particularly in the medium term, because of the possibility that inflation expectations could rise as a result of the public’s concerns about extraordinary monetary policy stimulus and large federal budget deficits.”

This paragraph sums up the market's view as a whole. Some are concerned about inflation, some believe it's not a problem at all. In this sort of scenario, the Fed has historically erred on the side of rates too low, for too long. Another dollar negative.

EUR, AUD, CAD, NZD all hit session highs immediately after the release