The FOMC minutes were dovish. It mentioned that “a few” members thought more stimulus would probably be needed to meet the mandate, while “several” thought more action would be appropriate under certain conditions.
Three such conditions were put forward: if growth slowed, if risks to the growth outlook increased or if inflation were at risk of falling below target persistently. “A few members” worried that accommodation posed inflation risks. On the growth outlook, “most members” expected a slower rate of growth over coming quarters, while a few thought the slowdown was transitory. The risk list contained, fiscal policy, higher financial risk, the economic performance outside the US and slow household income.
Overall though, the Minutes conveyed the message that the Fed is ready for more action if one of the three above mentioned conditions are materializing. Apparently, there was some initial disappointment, which we don’t understand fully. As the Fed didn’t start QE3 at the last meeting, one reasonably couldn’t expect a still more dovish statement. Otherwise they would have started QE-3 at that meeting. If data remain weak, especially if the July payrolls disappoint again, we think they’ll start QE-3.