Highlights
The minutes of the FOMC meeting held on August 7, 2007 indicate that the FOMC was already very aware of liquidity issues and rising volatility in the financial markets when the FOMC voted to retain its anti-inflation bias. However, the FOMC noted that further turbulence in the financial markets could warrant a policy response.

"However, a further deterioration in financial conditions could not be ruled out and, to the extent such a development could have an adverse effect on growth prospects, might require a policy response. Policymakers would need to watch the situation carefully. For the present, however, given expectations that the most likely outcome for the economy was continued moderate growth, the upside risks to inflation remained the most significant policy concern."

The Fed did lower its forecasts for both real economic growth and for core inflation in 2007. But because continued strong growth and high resource utilization, the Fed left its forecast for core inflation unchanged for 2008.

The minutes make it quite clear that the Fed was keeping its finger on the pulse of the financial markets.

"Participants noted that investors had become much more uncertain about the likely future cash flows from subprime and certain other nontraditional mortgages, and thus about the valuation of securities backed by such mortgages. Consequently, the markets for securities backed by subprime and other non-traditional mortgages had become illiquid, and originations of new subprime mortgages had dropped sharply. While these markets were expected to recover over time, it was anticipated that credit standards for these types of mortgages would be tighter, and interest rates higher relative to rates on conforming mortgages, in the future than in recent years. However, participants also observed that mortgage loans remained readily available to most potential borrowers, and that interest rates on conforming, conventional mortgage loans had declined in recent weeks, providing some support to the housing sector."

Despite the turbulence in the financial markets, the Fed was focusing more on the real economy and on inflation trends. These included the belief by the Fed that inflation risks were still the primary concern.

"In addition, the Committee agreed that the statement should again note that readings on core inflation had improved modestly in recent months but did not yet convincingly demonstrate a sustained moderation of inflation pressures, and that the high level of resource utilization had the potential to sustain inflation pressures. Against this backdrop, members judged that the risk that inflation would fail to moderate as expected continued to outweigh other policy concerns."

The bottom line is that the Fed had already thought about the potential need for a rate cut at the August 7 meeting but determined that more incoming information on inflation or a worsening in the financial markets would be needed before cutting rates. The minutes can either be seen to confirm the view that a rate cut on September 18 - the next FOMC meeting - is a done deal or that incoming data - such as the next employment report and CPI report -will determine the Fed's move.

2007 Release Schedule

Released On: 1/3 2/21 4/11 5/30 7/19 8/28 10/9 11/20 Released For: Dec Jan Mar Apr Jun Jul Sep Oct