Minutes: Fed Saw Limits of Monetary Policy

In recent meetings at which extraordinary steps were taken, the Federal Reserve's monetary policy-making panel had concluded that "monetary policy alone could not address fully the underlying problems in the housing market and in financial markets," according to newly released minutes from the meetings. At the March 18 meeting, held in the wake of liquidity concerns at Bear Stearns and Fed assistance that helped mitigate them, members of the Federal Open Market Committee said they had seen "evidence that an adverse feedback loop was under way, in which a restriction in credit availability prompts a deterioration in the economic outlook that, in turn, spurs additional tightening in credit conditions." Minutes of a March 10 conference call, in which the FOMC decided to provide a new term securities lending facility to ease mortgage-related liquidity concerns, are sparse. But they note that participants did have concerns about the possible precedent set by the facility and how well it would work in practice. But "on balance" the minutes indicate that FOMC members considered the facility something that "could prove useful in preventing an escalation of an unhealthy dynamic that was developing in money and credit markets."