Excerpt on policy from Sept 16-17 FOMC minutes

(Reuters) - The following is an excerpt covering the Federal Open Market Committee's discussion of monetary policy taken from the minutes of the FOMC's Sept. 16-17 meeting, which were released on Thursday.

For a full text, see http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

"In their discussion of monetary policy for the period ahead, members judged that information received since

the FOMC met in July indicated that economic activity was expanding at a moderate pace. Although net exports

remained soft, economic growth was broadly based. Members noted that recent global and financial market developments might restrain economic activity somewhat as a result of the higher level of the dollar and

possible effects of slower economic growth in China and in a number of emerging market and commodity producing economies. Nevertheless, they still viewed the risks to U.S. economic activity as nearly balanced, and they continued to expect that, with appropriate policy accommodation, economic activity would most likely continue to expand at a moderate pace.

"Members agreed that labor market conditions had improved considerably since earlier in the year, with ongoing solid gains in payroll employment and the unemployment rate falling to a level quite close to their estimates of its longer-run normal rate. Members anticipated that economic activity was likely to continue to expand at a pace sufficient to lead to a further reduction in underutilization of labor resources. Headline inflation continued to be held down by the effects of declines in energy and commodity prices, and the year-over-year increase in core PCE inflation remained below the Committee’s objective.

Survey-based measures of longer-term inflation expectations had remained stable; market-based measures of inflation compensation had moved lower.

Members anticipated that the declines in oil prices and the appreciation of the dollar over the intermeeting period were likely to exert some additional downward pressure on inflation in the near term. Members expected inflation to rise gradually toward 2 percent over the medium term as the labor market improved further and the transitory effects of declines in energy and import prices dissipated, but they agreed to continue to monitor inflation developments closely.

"In assessing whether economic conditions had improved sufficiently to initiate a firming in the stance of

policy, many members said that the improvement in labor market conditions met or would soon meet one of

the Committee’s criteria for beginning policy normalization.

But some indicated that their confidence that inflation would gradually return to the Committee’s 2 percent

objective over the medium term had not increased, in large part because recent global economic and financial

developments had imparted some restraint to the economic outlook and placed further downward pressure

on inflation in the near term. Most members agreed that their confidence that inflation would move to the

Committee’s inflation objective would increase if, as expected, economic activity continued to expand at a moderate rate and labor market conditions improved further.

Many expected those conditions to be met later this year, although several members were concerned about downside risks to the outlook for real activity and inflation.

"Other factors important to the Committee’s assessment of the inflation outlook were the expectation that the influences of lower energy and commodity prices on headline inflation would abate, as had occurred in previous episodes, and that inflation expectations would remain stable. With energy and commodity prices expected to stabilize, members’ projections of inflation incorporated a step-up in headline inflation next year. However, several members saw a risk that the additional downward pressure on inflation from lower oil prices and a higher foreign exchange value of the dollar could persist and, as a result, delay or diminish the expected upturn in inflation.

And, while survey measures of longer-run inflation expectations remained stable, a couple of members expressed unease with the decline in market-based measures of inflation compensation over the intermeeting

period.

"After assessing the outlook for economic activity, the labor market, and inflation and weighing the uncertainties associated with the outlook, all but one member concluded that, although the U.S. economy had strengthened and labor underutilization had diminished, economic conditions did not warrant an increase in the target range for the federal funds rate at this meeting. They agreed that developments over the intermeeting period had not materially altered the Committee’s economic outlook. Nevertheless, in part because of the risks to the outlook for economic activity and inflation, the Committee decided that it was prudent to wait for additional information confirming that the economic outlook had not deteriorated and bolstering members’ confidence that inflation would gradually move up toward 2 percent over the medium term. One member, however, preferred to raise the target range for the federal funds rate at this meeting, indicating that the current low level of real interest rates was not appropriate in the context of

current economic conditions.

"The Committee agreed to maintain the target range for the federal funds rate at 0 to 1/4 percent and to reaffirm in its post meeting statement that the Committee’s decision about how long to maintain the current target range for the federal funds rate would depend on its assessment of actual and expected progress toward its objectives of maximum employment and 2 percent inflation.

Members agreed that the Committee’s evaluation of progress on its objectives would take into account a wide

range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. They also agreed to indicate that the Committee continued to anticipate that it would be appropriate to raise the target range for the federal funds rate when it sees some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. It was noted that the expected path of the federal funds rate, rather than the exact timing of the initial increase, was most important in influencing financial conditions and thus the outlook for the economy and inflation.

The Committee reiterated its expectation that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some ime, warrant keeping the target federal funds rate below evels the Committee views as normal in the longer run.

"The Committee also maintained its policy of reinvesting rincipal payments from its agency debt and agency

mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions."

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