The minutes of the September meeting of the Federal Reserve's Open Market Committee, released Tuesday afternoon, left enough of an opening for further stimulative action to cause the stock markets to reverse and post gains for the first time on the day.
The committee agreed with one dissenting vote last month to hold its target interest rate between 0% and 0.25%, but the minutes indicated a growing interest in providing further aid to the economy.
According to a transcript of the minutes posted on the Fed OMC's website, "Although participants considered it unlikely that the economy would reenter a recession, many expressed concern that output growth, and the associated progress in reducing the level of unemployment, could be slow for some time.Participants noted a number of factors that were restraining growth, including low levels of household and business confidence, heightened risk aversion, and the still weak financial conditions of some households and small firms. A few participants noted that economic recoveries were often uneven and were typically slow following downturns triggered by financial crises. A number of participants observed that the sluggish pace of growth and continued high levels of slack left the economy exposed to potential negative shocks. Nevertheless, participants judged the economic recovery to be continuing and generally expected growth to pick up gradually next year."
The minutes continued, "Many participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate or if inflation continued to come in below levels consistent with the FOMC's dual mandate, it would be appropriate to provide additional monetary policy accommodation. However, others thought that additional accommodation would be warranted only if the outlook worsened and the odds of deflation increased materially."
The committee discussed several ways to aid the economy, the minutes said, but they "focused primarily on further purchases of longer-term Treasury securities and on possible steps to affect inflation expectations."
Perhaps setting the stage for a reversal of course on rates, the minutes stated, "A number of participants commented on the important role of inflation expectations for monetary policy: With short-term nominal interest rates constrained by the zero bound, a decline in short-term inflation expectations increases short-term real interest rates (that is, the difference between nominal interest rates and expected inflation), thereby damping aggregate demand. Conversely, in such circumstances, an increase in inflation expectations lowers short-term real interest rates, stimulating the economy."
Regarding the employment picture, the Fed committee also seemed conflicted."A number of participants noted that the current sluggish pace of employment growth was insufficient to reduce unemployment at a satisfactory pace.Several participants reported feedback from business contacts who were delaying hiring until the economic and regulatory outlook became more certain. Participants discussed the possible extent to which the unemployment rate was being boosted by structural factors such as mismatches between the skills of the workers who had lost their jobs and the skills needed in the sectors of the economy with vacancies, the inability of the unemployed to relocate because their homes were worth less than their mortgages, and the effects of extended unemployment benefits. Participants agreed that factors like these were pushing the unemployment rate up, but they differed in their assessments of the extent of such effects.Nevertheless, many participants saw evidence that the current unemployment rate was considerably above levels that could be explained by structural factors alone, pointing, for example, to declines in employment across a wide range of industries during the recession, job vacancy rates that were relatively low, and reports that weak demand for goods and services remained a key reason why firms were adding employees only slowly."
The major stock indices began paring losses almost immediately upon the release of the minutes at 2:15 Tuesday. A half hour later, the NASDAQ and S&P remained up while the Dow slipped back into the red.