While I watch Gold spot and EUR/USD, here is the FOMC Minutes release from the 1/26-1/27/2010 Federal Open Market Committee meeting. This is just a portion of the text, I embedded the full PDF below. They talked about asset sales and reducing reserve balances. Yields rose a bit today.
"Finally, staff noted that the Committee might want to address both the eventual size of the Federal Reserve's balance sheet and its composition. Policymakers were unanimous in the view that it will be appropriate to shrink the supply of reserve balances and the size of the Federal Reserve's balance sheet substantially over time. Moreover, they agreed that it will eventually be appropriate for the System Open Market Account to return to holding only securities issued by the U.S. Treasury, as it did before the financial crisis. Several thought the Federal Reserve should hold, eventually, a portfolio composed largely of shorter-term Treasury securities. Participants agreed that a policy of redeeming and not replacing agency debt and MBS as those securities mature or are prepaid would contribute to achieving both goals and thus would be appropriate. Many thought it would also be desirable to redeem some or all of the Treasury securities owned by the Federal Reserve as they mature, recognizing that at some point in the future the Federal Reserve would need to resume purchases of Treasury securities to offset reductions in other assets and to accommodate growth in the public's demand for U.S. currency. Participants expressed a range of views about asset sales. Most judged that a future program of gradual asset sales could be helpful in shrinking the size of the Federal Reserve's balance sheet, reducing reserve balances, and shifting the composition of securities holdings back toward Treasury securities; however, many were concerned that such transactions could cause market disruptions and have adverse implications for the economic recovery, particularly if they were to begin before the recovery had become self-sustaining and before the Committee had determined that a tightening of financial conditions was appropriate and had begun to raise short-term interest rates. Several thought it important to begin a program of asset sales in the near future to ensure that the Federal Reserve's balance sheet shrinks more quickly and in a more predictable manner than could be achieved solely by redeeming maturing securities and not reinvesting prepayments; they judged that a program of asset sales spread over a number of years would underscore the Committee's determination to exit from the period of exceptionally accommodative monetary policy in a manner and at a pace that would keep inflation contained without having large effects on asset prices or market interest rates. A few suggested that the pace of asset sales, and potentially of purchases, could be adjusted over time in response to developments in the economy and the evolution of the economic outlook. The Committee made no decisions about asset sales at this meeting.
Staff Review of the Economic Situation
The information reviewed at the January 26-27 meeting suggested that economic activity continued to strengthen in recent months. Consumer spending was well maintained in the fourth quarter, and business expenditures on equipment and software appeared to expand substantially. However, the improvement in the housing market slowed, and spending on nonresidential structures continued to fall. Recent data suggested that the pace of inventory liquidation diminished considerably last quarter, providing a sizable boost to economic activity. Indeed, industrial production advanced at a solid pace in the fourth quarter. In the labor market, layoffs subsided noticeably in the final months of last year, but the unemployment rate remained elevated and hiring stayed weak. Meanwhile, increases in energy prices pushed up headline consumer price inflation even as core consumer price inflation remained subdued.
Some indicators suggested that the deterioration in the labor market was abating. The pace of job losses continued to moderate: The three-month change in private nonfarm payrolls had become progressively less negative since early 2009; that pattern was widespread across industries. The unemployment rate was essentially unchanged from October through December. The labor force participation rate, however, had declined steeply since the spring, likely reflecting, at least in part, adverse labor market conditions. Moreover, hiring remained weak, the total number of individuals receiving unemployment insurance--including extended and emergency benefits--continued to climb, the average length of ongoing unemployment spells rose steeply, and joblessness became increasingly concentrated among the long-term unemployed.
Total industrial production (IP) rose in December, the sixth consecutive increase since its trough. The gain in December primarily resulted from a jump in output at electric and natural gas utilities caused by unseasonably cold weather. Manufacturing IP edged down after large and widespread gains in November. For the fourth quarter as a whole, the solid increase in manufacturing IP reflected a recovery in motor vehicle output, rising export demand, and a slower pace of business inventory liquidation. Output of consumer goods, business equipment, and materials all rose in the fourth quarter, though the average monthly gains in these categories were a little smaller than in the third quarter. The available near-term indicators of production suggested that IP would increase further in coming months.
Consumer spending continued to trend up late last year but remained well below its pre-recession level. After a strong increase in November, real personal consumption expenditures appeared to drop back some in December. Retail sales may have been held down by unusually bad weather, but purchases of new light motor vehicles continued to increase. The fundamental determinants of household spending--including real disposable income and wealth--strengthened modestly, on balance, near the end of the year but were still relatively weak. Despite the improvement from early last year, measures of consumer sentiment remained low relative to historical norms, and terms and standards on consumer loans, particularly credit card loans, stayed very tight.
The recovery in the housing market slowed in the second half of 2009, even though a number of factors supported housing demand. Interest rates for conforming 30-year fixed-rate mortgages remained historically low. In addition, the Reuters/University of Michigan Surveys of Consumers reported that the number of respondents who expected house prices to increase continued to exceed the number who expected prices to decrease. Sales of existing single-family homes rose strongly from July to November but fell in December, a pattern that suggested sales were pulled ahead in anticipation of the originally scheduled expiration of the first-time homebuyer credit on November 30. Still, existing home sales remained above their level in earlier quarters. Sales of new homes also turned down in November and December, retracing part of their recovery earlier in the year. Similarly, starts of single-family homes retreated a little from June to December after advancing briskly last spring. The pace of construction was slow enough that even the modest pace of new home sales was sufficient to further reduce the overhang of unsold new single-family houses.
Real spending on equipment and software apparently rose robustly in the fourth quarter following a slight increase in the previous quarter. Spending on high-tech equipment, in particular, appeared to increase at a considerably more rapid clip in the fourth quarter than in the third; both orders and shipments of high-tech equipment rose markedly, on net, in October and November. Business purchases of motor vehicles likely also climbed in the fourth quarter. Outside of the transportation and high-tech sectors, business outlays on equipment and software appeared to change little in the fourth quarter. Conditions in the nonresidential construction sector generally remained poor. Real spending on structures outside of the drilling and mining sector dropped in the third quarter; data on nominal expenditures through November pointed to an even faster rate of decline in the fourth quarter. The pace of real business inventory liquidation appeared to decrease considerably in the fourth quarter. After three quarters of sizable declines, real nonfarm inventories shrank at a more modest pace in October, and book-value data for this category suggested that inventories may have increased in real terms in November. Available data suggested that the change in inventory investment—including a sizable accumulation in wholesale stocks of farm products—made an appreciable contribution to the increase in real gross domestic product (GDP) in the fourth quarter.
Consumer price inflation was modest in December after being boosted in the preceding two months by increases in energy prices. Core consumer price inflation remained subdued. Price increases for non-energy services slowed early last year and remained modest throughout 2009, reflecting declining prices for housing services and perhaps the deceleration in labor costs. Price increases for core goods were quite modest during the second half of 2009. According to survey results, households' expectations of near-term inflation increased in January; in addition, median longer-term inflation expectations edged up, though they remained near the lower end of the narrow range that has prevailed over the past few years.
The U.S. international trade deficit widened in November, as a sharp rise in nominal imports outpaced an increase in exports. The rise in exports was driven primarily by a large gain in agricultural exports, which was partially offset by a decline in exports of consumer goods that followed robust growth in October. Imports of oil accounted for roughly one-third of the increase in total imports, though most other categories of imports also recorded gains.
Incoming data suggested that activity in advanced foreign economies continued to expand in the fourth quarter, though at a moderate pace. However, unemployment rates remained elevated and consumption indicators were mixed. Credit conditions improved further, as lending to the private sector expanded in some economies. Increases in export and import volumes pointed to a gradual recovery in international trade. Economic activity in emerging market economies continued to expand in the fourth quarter, although at a pace slower than that of the third quarter. Within emerging Asia, growth appeared to have remained robust in China and to have slowed elsewhere. In Latin America, indicators pointed to a continuation of growth in much of the region, although growth in Mexico appeared to slow significantly following the third quarter's outsized gain. Amid rising energy prices, 12-month headline inflation for December picked up in all advanced foreign economies except Japan, where deflation moderated only mildly. Headline inflation continued to rise in emerging Asia, driven by energy and food prices. In Latin America, headline inflation remained below its earlier elevated pace.
Staff Review of the Financial Situation
The decision by the FOMC to keep the target range for the federal funds rate unchanged at the December meeting and its retention of the "extended period" language in the statement were widely anticipated by market participants and elicited little price response. Later in the intermeeting period, the expected path of the federal funds rate implied by federal funds and Eurodollar futures quotes shifted down slightly as investors apparently interpreted Federal Reserve communications, including the discussion of large-scale asset purchases in the FOMC minutes, as pointing to a more protracted period of accommodative monetary policy than had been anticipated. By contrast, yields on 2- and 10-year nominal Treasury securities were about unchanged on net. Inflation compensation based on 5-year Treasury inflation-protected securities (TIPS) increased; the increase likely reflected higher inflation risk premiums and a further improvement in TIPS market liquidity, along with some rise in inflation expectations owing, in part, to increases in oil prices. Inflation compensation 5 to 10 years ahead declined slightly.
Financial market conditions remained supportive of economic growth over the intermeeting period, and short-term funding markets were generally stable. Spreads between London interbank offered rates (Libor) and overnight index swap (OIS) rates at one- and three-month maturities remained low, while spreads at the six-month maturity continued to edge down. Spreads on A2/P2-rated commercial paper (CP) and AA-rated asset-backed CP held steady at the low end of the range that has prevailed since mid-2007. Strong demand for Treasury bills in the cash and repurchase agreement (repo) market, together with a seasonal decline in bills outstanding, put downward pressure on both bill yields and short-term repo rates. Although year-end pressures in short-term funding markets were generally modest amid ample liquidity, the repo market experienced some year-end dislocations, with a few transactions reportedly occurring at negative interest rates. Use of Federal Reserve credit facilities edged lower over the intermeeting period, and market commentary suggested little concern about the impending expiration of a number of the facilities.
After trending higher for most of the intermeeting period, broad stock price indexes subsequently reversed course amid elevated volatility, ending the period little changed on balance. The gap between the staff's estimate of the expected real equity return over the next 10 years for S&P 500 firms and the real 10-year Treasury yield--a rough gauge of the equity risk premium--stayed about the same and remained well above its average level during the past decade. Over the intermeeting period, yields on both investment-grade and speculative-grade corporate bonds edged down, while those on comparable-maturity Treasury securities held steady. Estimates of bid-asked spreads for corporate bonds--a measure of liquidity in the corporate bond market--remained steady. In the leveraged loan market, average bid prices rose further and bid-asked spreads were little changed.
Overall, net debt financing by nonfinancial businesses was near zero in the fourth quarter after declining in the third, consistent with weak demand for credit and still tight credit standards and terms at banks. In December, gross public equity issuance by nonfinancial firms maintained its solid pace and issuance by financial firms increased noticeably, as several large banks issued shares and used the proceeds to repay capital injections they had received from the Troubled Asset Relief Program. Financing conditions for commercial real estate, however, remained strained. Moody's index of commercial property prices showed another drop in October, bringing the index back to its 2002 level. Delinquency rates on loans in commercial mortgage-backed securities pools increased further in December. The average interest rate on 30-year conforming fixed-rate residential mortgages increased slightly over the intermeeting period but remained within the narrow range of values over recent months. Consumer credit contracted for the 10th consecutive month in November, owing to a further steep decline in revolving credit. Credit card interest rate spreads continued to increase in November. In contrast, spreads on new auto loans extended their downtrend through early January. Delinquency rates on consumer loans remained high in recent months. Issuance of credit card asset-backed securities was minimal in October and November but picked up in December after the Federal Deposit Insurance Corporation announced a temporary extension of safe-harbor rules for its handling of securitized assets should a sponsoring bank be taken into receivership.
Commercial bank credit continued to contract in December, as an increase in banks' securities holdings was more than offset by a large drop in total loans. Commercial and industrial loans and commercial real estate loans again fell markedly. Although a substantial fraction of banks continued to tighten their credit policies on commercial real estate loans in the fourth quarter, lending standards for most other types of loans were little changed, according to the January Senior Loan Officer Opinion Survey on Bank Lending Practices. Nonetheless, standards and terms on all major loan types remained tight, and the demand for loans reportedly weakened further.
M2 continued to expand sluggishly in December. Growth of liquid deposits remained robust, but small time deposits and retail money market mutual funds again contracted at a rapid pace in response to the low yields on those assets. The monetary base and total bank reserves were roughly flat, as the contraction in credit outstanding from the Federal Reserve's liquidity and credit facilities was about offset by the Desk's purchases of agency debt and MBS.
Over the intermeeting period, benchmark sovereign yields in most advanced foreign economies displayed some volatility but ended little changed on net. Global sovereign bond offerings since the start of the year had been reasonably well received, although mounting fiscal concerns made investors more reluctant to hold debt issued by the Greek government; sovereign yields rose in Greece and, to a lesser extent, in several other countries where fiscal issues have raised concerns among investors. All major foreign central banks kept their policy rates unchanged. Foreign equity prices generally ended the intermeeting period down. European financial stocks declined substantially, as early profit reports for the fourth quarter from a few banks rekindled some concerns about the health of the banking system. The broad nominal index of the foreign exchange value of the dollar rose, reportedly reflecting a growing perception that U.S. growth prospects were better than those in Europe and Japan. Concerns that policy tightening by China might restrain the global recovery also may have contributed to the dollar's appreciation against many currencies late in the period.
Staff Economic Outlook
In the forecast prepared for the January FOMC meeting, the staff revised up its estimate of the increase in real GDP in the fourth quarter of 2009. The upward revision was in inventory investment; the staff's projection of the increase in final demand was unchanged. Nonfarm businesses apparently moved earlier to stem the pace of inventory liquidation than the staff had anticipated. As a result, the economy likely entered 2010 with production in closer alignment with sales than the staff had expected in mid-December. Apart from the fluctuations in inventories, economic developments largely were as the staff had anticipated. The incoming information on the labor market and industrial production was broadly consistent with staff expectations, and, though housing activity seemed to be on a lower-than-anticipated trajectory, recent data on business capital spending were slightly above expectations. 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 staff also continued to expect that resource slack would be taken up only gradually over the forecast period." [Source: FederalReserve.gov]
FOMC Minutes for 1/27/2010 (Released Feb 17, 2010)