Fed Minutes Signal Renewed Large-Scale Asset Purchases May Not Be Imminent
Fed Reserve Chairman Ben S. Bernanke
Mahmood Fazal/Bloomberg
Federal Reserve Chairman Ben S. Bernanke said Aug. 27 that the central bank has the tools to prevent a relapse into recession, while stopping short of indicating an immediate need for more stimulus.
Federal Reserve Chairman Ben S. Bernanke said Aug. 27 that the central bank has the tools to prevent a relapse into recession, while stopping short of indicating an immediate need for more stimulus. Photographer: Mahmood Fazal/Bloomberg
Sept. 1 (Bloomberg) -- Dean Maki, chief U.S. economist at Barclays Capital, talks with Bloomberg's Melissa Long and Michael McKee about market reaction to the latest U.S. economic data and the outlook for the economy. (Source: Bloomberg)
The Federal Reserve signaled easier monetary policy this month is no sure thing, saying some officials were concerned investors would misinterpret the Aug. 10 decision to put a floor on securities holdings.
“A few members worried” the move “could send an inappropriate signal to investors about the committee’s readiness to resume large-scale asset purchases,” the Fed said yesterday in minutes of the session. Chairman Ben S. Bernanke said Aug. 27 that the central bank has the tools to prevent a relapse into recession, while stopping short of indicating an immediate need for more stimulus.
The report, while noting the risk of “further adverse shocks,” didn’t indicate what development would prod the Fed to take further action at its Sept. 21 meeting with unemployment near a 26-year high. Some investors initially took the Aug. 10 decision as a sign the central bank would soon restart bigger securities purchases, said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York.
“It’s clear from Chairman Bernanke’s speech and the minutes that was not the message they meant to send,” said Maki, a former Fed researcher. “A significant downgrading of the outlook is likely to be needed” before policy makers provide more accommodation.
“It’s possible that particularly weak labor market data would push them in that direction, but the Fed has not made clear exactly what the thresholds are,” Maki said. Policy makers haven’t agreed on “specific criteria or triggers for further action,” Bernanke said in the speech.
Jobs Report
The Labor Department’s jobs report for August, to be released Sept. 3, may say private payrolls rose by 42,000 after a 71,000 July gain, while the unemployment rate increased to 9.6 percent from 9.5 percent, according to the median estimates of economists surveyed by Bloomberg News.
Officials at the meeting “generally saw both employment and inflation as likely to fall short of levels consistent with the dual mandate for longer than had been anticipated,” the minutes said, referring to the Fed’s twin goals of full employment and price stability.
Central bank policy makers disagreed over the cause of slow hiring, with some saying that businesses claimed fiscal and regulatory uncertainty was restraining hiring. Others said that “slow growth in sales and uncertainty about the strength and durability of the recovery likely were more important factors,” according to the report.
At the same time, some officials saw “increased downside risks to the outlook for both growth and inflation” and voiced concern that further shocks would cause “significant slowing in growth.”
Mortgage Assets
Fed officials agreed at the meeting to put a $2.05 trillion floor on securities holdings and buy Treasuries to replace an estimated $395 billion of mortgage assets that would be repaid from August 2010 through the end of 2011.
The central bank left its benchmark rate in a range of zero to 0.25 percent and reiterated its pledge since March 2009 to keep rates very low for an “extended period.”
The Fed bought the housing debt to reduce borrowing costs and revive the economy after the worst downturn since the Great Depression. As borrowers paid off or refinanced loans at an increasing pace, policy makers grew concerned longer-term rates would rise, the minutes said.
“Most members thought that the resulting tightening of financial conditions would be inappropriate, given the economic outlook,” the report said.
Weakening Outlook
Several officials said the Fed would need to consider ways to add monetary stimulus “if the outlook were to weaken appreciably,” the minutes said. The Fed also said it may start reinvesting mortgage payments in mortgage-backed securities instead of Treasuries “if conditions were to change.”
A weak jobs report this week may lead Bernanke to push for more easing soon, given that even optimistic forecasts “have unemployment at a very high level, unacceptable to this society, for a very long time,” said Neal Soss, chief economist at Credit Suisse in New York”
“The hurdle is not all that high,” said Soss, who worked as an aide to former Fed Chairman Paul Volcker. “It’s very difficult for this chairman in particular to resist the urge to do something.”
U.S. stocks pared gains after the report. The Standard & Poor’s 500 Index rose less than 0.1 percent to 1,049.33 as of the 4 p.m. close of trading in New York and has dropped 7 percent since Aug. 9, the day before the FOMC decision. The yield on 10-year Treasury securities fell 0.06 percentage point to 2.47 percent yesterday.
Pickup in Growth
“Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 remain in place,” Bernanke, 56, said in last week’s speech to central bankers and economists in Jackson Hole, Wyoming.
If the outlook deteriorates, the Fed will act, the former Princeton University economist said. The issue is not whether additional tools will be effective; it’s whether the benefits outweigh the costs, he said.
Fed staff economists said at the session the pace of the economic recovery had slowed in recent months and lowered their projection for growth in the second half of 2010. They “continued to anticipate a moderate strengthening of the expansion in 2011,” the minutes said.
Michael Dueker, head economist at Russell Investments in Tacoma, Washington, said there is an “even chance” of further quantitative easing, or use of tools such as asset purchases, before year’s end.
“Chances are very low that they take more action in September,” said Dueker, a former member of the St. Louis Fed research staff. “Quantitative easing is a bigger step than a quarter- or half-point cut in the interest rate. This is going to require more evidence.”
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Joshua Zumbrun in Washington at jzumbrun@bloomberg.net.
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