The minutes from the June FOMC meeting indicated that a few of their members were ‘either favoring or willing to consider additional easing if conditions weaken’. They even suggested that additional easing may occur ‘sooner than later’. According to Bank of
“We expect that the outlook will be weak enough to warrant additional Fed easing by the September 12-13 FOMC meeting; we look for Fed officials to both push out their forward guidance on rates until at least mid-2015 and to launch QE3.”
There was growing pessimism in the FOMC as well:
“They also shifted their assessment of risks to be even more negative — more supportive of additional easing for most members — than in April’s minutes.”
Members also recognized a potential threat to headline and core inflation risks skewed more the downside. The minutes also noted that members would be more willing to consider and warrant easing under the following conditions:
“(1) The recovery loses momentum;
(2) Downside risks were significant;
(3) Inflation would persistently undershoot the Fed’s target.”
Bank of America in its reports also stated:
“In the SEP, 2 members said their forecasts were conditioned on additional asset purchases, and 2 others said they would consider such a response. If all members’ policy projections were conditioned on a downside scenario, we would expect more would indicate they favored easing, consistent with the minutes.”
The Fed is likely to explore additional policy options. Based on the minutes it was noted that Fed was “to explore “new tools” to support financial conditions — likely meaning liquidity tools, rather than direct lending or targeting a long yield”.
Bank of America’s report also noted:
“Members wanted “a better understanding” of how asset purchases might impact market functioning, although “members generally agreed” that the risks of disruption were currently low and the benefits outweigh these costs.”
Going forward we can expect the Fed to take necessary actions if the economy becomes weaker. We will have to wait for the minutes from the July FOMC meeting.