With recent data indicating a slowdown in the pace of the economic recovery, the minutes of the August Federal Open Market Committee showed that members of committee said that the Fed should begin to consider steps it could take to provide additional stimulus if the economic outlook weakens further.
The committee members also agreed that the softer tone of recent data called for changes to the FOMC's characterization of the economic and financial situation.
Subsequently, the statement released by the FOMC following the meeting noted that the pace of recovery in output and employment has slowed in recent months. This compares to the June statement, which said that data suggested that the economic recovery is proceeding and that the labor market is improving gradually.
Most members of the FOMC also agreed that the weakness of the recent data made it appropriate to reiterate that conditions were likely to warrant exceptionally low interest rates for an extended period.
Once again, Kansas City Federal Reserve President Thomas Hoenig objected to the language, however, arguing that the economic recovery was proceeding about as outlined earlier this year and that the Fed should begin the gradual process of removing policy accommodation fairly soon.
While the committee members still saw the economic expansion continuing, some expressed concerns that further adverse shocks in the current environment of weaker than anticipated growth could have disproportionate effects, resulting in a significant slowing in growth going forward.
In light of the economic concerns, the FOMC discussed the implications of continuing its policy of not reinvesting principal repayments received on mortgage-backed securities or maturing agency debt.
The Fed noted that increased mortgage refinancing activity would accelerate repayments of principal on mortgage-backed securities in the central bank's portfolio, leading private investors to hold more longer-term securities and pushing longer-term interest rates somewhat higher.
Due to concerns about the resulting tightening of financial conditions, all but one member of the FOMC concluded that it would be appropriate to begin reinvesting principal received on mortgage-backed securities or maturing agency debt by purchasing longer-term Treasury securities.
As was widely expected, the FOMC also agreed to maintain the target range for the federal funds rate at zero to 0.25 percent. The Fed's target rate has remained unchanged since being lowered to its current record low level in December of 2008.
The FOMC, the monetary policy setting arm of the Federal Reserve, is due to hold its next meeting on interest rates on September 21st.
The contents of the August minutes largely mirrored comments Fed Chairman Ben Bernanke made at the Kansas City Fed's Economic Symposium in Jackson Hole, Wyoming, on Friday, when he acknowledged that the Fed would deploy additional tools to promote economic growth if conditions worsen further.
"Should further action prove necessary, policy options are available to provide additional stimulus," Bernanke said, although he noted, "Any deployment of these options requires a careful comparison of benefit and cost."
He added, "However, the Committee will certainly use its tools as needed to maintain price stability--avoiding excessive inflation or further disinflation--and to promote the continuation of the economic recovery."
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