Fed Minutes Confirm Intense Debate Over Recovery

According to the minutes from the Federal Reserve's August 9-10 meeting, the central bankers agreed that the U.S. economy was operating far below its potential. Despite this, some members questioned the Fed's decision to maintain the current accommodative monetary policy.

After what appears to have been an extensive, diverse debate, and with Kansas City Fed President Thomas Hoening in dissent, the Fed agreed to take one small step to support the economy -- investing the proceeds of mortgage-backed securities into Treasuries to maintain the Fed's current approach.

Differing Viewpoints on Reinvesting Proceeds

"All but one member concluded that it would be appropriate to begin reinvesting principal received from agency debt and MBS held in the SOMA [System Open Market Account] by purchasing longer-term Treasury securities in order to keep constant the face value of securities held in the SOMA and thus avoid the upward pressure on longer-term interest rates that might result if those holdings were allowed to decline," the Fed said.

However, the Fed added, "A few members worried that reinvesting principal from agency debt and MBS in Treasury securities could send an inappropriate signal to investors about the Committee's readiness to resume large-scale asset purchases."

In addition, several members said the Fed would need to consider ways to increase monetary stimulus, "if the outlook were to weaken appreciably further."

The minutes also indicated that the central bank was divided regarding the U.S. economic outlook and what would be the appropriate response to prevent further weakness. Nevertheless, most Fed members believed the economic recovery was still capable of achieving a moderate growth rate in 2011, the Fed minutes indicated.

Fed Sees Inflation as Subdued

On inflation, the central bank said it expected inflation "to remain subdued over the next year and a half."

On U.S. GDP, the Fed said "the staff lowered its projection for the increase in real economic activity during the second half of 2010 but continued to anticipate a moderate strengthening of the expansion in 2011," the Fed said.

The minutes were released following the annual meeting of central bankers and other key economic and financial professionals hosted by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming, attended by Fed Chairman Ben Bernanke.

At the gathering, Bernanke underscored that the Fed retains the means and tools necessary to take additional action to liquefy credit markets and/or stimulate the U.S. economy, should the central bank decide it's prudent to do so. However, Bernanke added that the economic recovery will require successful performances by many players, not just the world's central bankers.