FOMC’s Minutes Of Meetings and Fiscal Cliff

The Federal Open Market Committee’s (FOMC) bond purchases worth USD 85 billion per month have generated different opinions from the policymakers of the committee. ‘The world’s largest economy is on a moderate growth path,’ stated the recently released minutes of meetings.

The general view of the committee is to change the pace of the bond purchases in response to economic growth. Some believe that the pace of bond buying must vary incrementally from meeting to meeting, as new information about the economy becomes available. A few policymakers opine that the ongoing evaluation of the effectiveness, costs, and risks of asset purchases may lead the committee to gradually decline or end the bond purchases before any substantial improvement in the labour market is seen. Some, on the other hand, were of the opinion that the asset purchases should continue until substantial improvement in the labour market is observed.

FOMC has stated that the partial resolution of the fiscal cliff has eliminated uncertainty over the fiscal policy but the risk of automatic budget cuts still remain. The increased taxes in January 2013 would however lead to a decline in the consumer spending. It has also said that the strain in the global financial markets has eased due to which, the downside risk of the economy has reduced. The Fed also said that the economy has shown a moderated growth but its growth projections have not changed.

From one of its survey, the committee has found that businesses in some states are expecting better growth this year and the hiring prospects in 2013 remain positive. It however believes that the unemployment rate has remained above longer-run normal level estimates, indicating that the recovery in the labour market seems far from complete. It has also said that the demand for housing, furnishing and construction is increasing. The members of the committee, citing one of the reports, said that there is a higher scope of overall growth in the housing market.

The Fed members have clearly expressed concerns on the fiscal cliff which will lead to the spending cuts after February. The Obama administration temporarily averted the fiscal cliff in January 2013 but it has called for another meeting towards February end to further discuss the spending cuts. The bond purchases have increased the liquidity in the global markets and any decision that impacts this would suck the liquidity in the markets particularly from the commodity markets as that is where the liquidity first goes.