Skip to main content

Minutes from the Federal Open Market Committee's

Jan. 26-27 meeting show that the members' economic outlook was little changed from the last meeting but several members are starting to think about asset sales, which members largely agreed are needed to shrink the

Federal Reserve's

balance sheet.

Asset sales were discussed at length, although the committee didn't make a final decision regarding the sales. Most policymakers considered a future program of gradual asset sales as helpful in shrinking the size of the Fed's balance sheet, lowering reserve balances and making the shift back to holding only Treasury securities.

The timing of the sales, however, was an area of contention as members worried that the sales could disrupt the market and trip up economic recovery if not initiated once the recovery had become self-sustaining. One possible solution that members discussed was to adjust the pace of sales and possible purchases to reflect changes in the economic outlook.

Members went so far as to discuss the wording of references to its securities purchases as it approaches the end of the programs. One member suggested saying that the committee would evaluate its "holdings" of securities -- swapping out "purchases" -- to reflect that the committee may decide to sell or purchase additional securities. But other members deemed the change to be premature and the original wording stood.

Deeming that the functioning of most financial markets was no longer substantially impaired, members agreed to move ahead with originally targeted expiration dates for support facilities and further scaled back amounts available through the Term Auction Facility.

As far as the committee's economic outlook, members agreed that economic activity has continued to improve, with consumer spending holding up and business spending on equipment and software showing strong growth. As usual, the housing market remained a concern, as did the weak labor market. Members acknowledged substantial declines in layoffs but noted sluggish hiring trends and a high unemployment rate.

On Wednesday,


(HUM) - Get Humana Inc. Report

announced net

job losses of 1,400 in 2010. On Tuesday,

TheStreet Recommends


(F) - Get Ford Motor Company Report

said it will cut 900 factory jobs, and


(MRK) - Get Merck & Co., Inc. Report

announced a 15% reduction to its workforce by the end of 2012.

More than any other factor, the prospects for job growth remained the biggest uncertainty in the economic outlook.

"The staff continued to project a moderate recovery in economic activity over the next two years, with economic growth supported by the accommodative stance of monetary policy and by a further waning of the factors that weighed on spending and production over the past two years," the minutes read.

Meeting notes also indicated that the policymakers' forecasts for "slowing of core and headline inflation over the next two years were little changed."

Kansas City Federal Reserve Bank President Thomas Hoenig was the only one to oppose the statement that economic and financial conditions would likely "warrant exceptionally low levels of the federal funds rate for an extended period."

Hoenig argued that because economic and financial conditions have been steadily improving, keeping rates low for a long period "would lay the groundwork for future financial imbalances and risk an increase in inflation expectations." Hoenig preferred to say that the federal funds rate would remain low for "some time," thereby giving the committee more flexibility.

The timing of a change to the federal funds rate will likely dominate discussions of the committee's next meeting , scheduled for March 16.

-- Written by Melinda Peer in New York