Fed Officials Disagreed Over $600 Billion Stimulus Program, Minutes Show
U.S. Chairman of the Federal Reserve
Andrew Harrer/Bloomberg
Ben S. Bernanke, chairman of the U.S. Federal Reserve.
Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Andrew Harrer/Bloomberg
Federal Reserve policy makers disagreed over expanding record monetary stimulus this month, with a majority seeing a boost to growth and employment and a minority concerned about risks to inflation and the dollar.
Most officials at the Nov. 2-3 meeting saw additional securities purchases as keeping interest rates low and boosting asset prices, the Fed said in minutes of the session released today in Washington. The Fed also said it’s considering ways to improve communication with the public, such as initiating press briefings by Chairman Ben S. Bernanke.
The report illustrates the tension within the Fed over the decision to buy $600 billion of Treasuries, which has since attracted criticism from Republican politicians at home and some governments abroad. Increased internal disagreement over the purchases may hamper officials’ resolve to complete the entire amount of purchases scheduled through June.
Most expected the purchases “to help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with” the Fed’s legislative mandate, the Fed’s Open Market Committee said in the minutes.
“Some participants noted concerns that additional expansion of the Federal Reserve’s balance sheet could put unwanted downward pressure on the dollar’s value in foreign exchange markets,” the minutes said.
Long-Term Projection
During the meeting, Fed officials raised their unemployment projections for the next two years while lowering their 2011 growth outlooks. Some policy makers raised their long-run jobless-rate projection, signaling they see some further permanent effects from the recession on U.S. unemployment. The median range rose to 5 percent to 6 percent from 5 percent to 5.3 percent.
U.S. stocks remained lower after the report, with the Standard & Poor’s 500 Index falling 1.4 percent to 1,180.73 at the 4 p.m. close of trading in New York. The yield on the benchmark 10-year note fell three basis points, or 0.03 percentage point, to 2.78 percent.
The Fed disclosed that the FOMC held a videoconference meeting Oct. 15 to discuss the merits of larger versus smaller blocks of asset purchases and ways to improve communication.
For the purchases, most officials “saw advantages to a more incremental approach that would involve smaller changes in the Committee’s holdings of securities calibrated to incoming data,” the Fed said.
Numerical Objective
In addition, officials discussed whether to adopt a numerical inflation objective and decided to retain the policy of giving policy makers’ long-run inflation projections, the Fed said. Officials also discussed whether it would be “useful” for Bernanke to “hold occasional press briefings to provide more detailed information to the public” than is included in the post-meeting statements.
Vice Chairman Janet Yellen will chair a subcommittee to review the FOMC’s “communication guidelines with the aim of ensuring that the public is well informed about monetary policy issues while preserving the necessary confidentiality of policy discussions until their scheduled release,” the minutes said. No deadline was given.
Bernanke led his colleagues in the asset purchases after buying $1.7 trillion in mortgage debt and Treasuries through March, which helped pull the U.S. out of the worst recession in seven decades without reducing an unemployment rate close to a 26-year high.
Hoenig Dissent
While Kansas City Fed President Thomas Hoenig was the lone voting FOMC member to dissent, several other officials, including Fed Governor Kevin Warsh and Charles Plosser, president of the Philadelphia Fed, have expressed skepticism over the strategy.
The FOMC said in its Nov. 3 statement that the jobless rate is too high and inflation too low compared with long-run levels consistent with the Fed’s legislative mandates for stable prices and maximum employment. Progress toward those objectives “has been disappointingly slow,” the Fed said.
The second round of so-called quantitative easing, dubbed QE2 by investors and economists, has been criticized by Republican politicians as well as officials in China, Germany and Brazil, who say it has weakened the dollar and risks igniting inflation. Bernanke countered in a Nov. 19 speech that central bankers are “unwaveringly committed to price stability” and that the U.S. was at risk of letting too many people be out of work for too long.
Jobless Rate
At the meeting, Fed policy makers projected a fourth- quarter 2011 unemployment rate of 8.9 percent to 9.1 percent, compared with 8.3 percent to 8.7 percent in their previous forecast in June. For 2012, the jobless rate will be 7.7 percent to 8.2 percent, up from prior projections of 7.1 percent to 7.5 percent. The rate was 9.6 percent in October, marking 18 months at 9.4 percent or higher.
The projections are the first published updates since July under the Fed’s four-times-a-year schedule.
Officials said the economy will expand by 3 percent to 3.6 percent next year, down from a 3.5 percent to 4.2 percent projection in June; the 2012 forecasts of 3.6 percent to 4.5 percent growth compare with the prior projections of 3.5 percent to 4.5 percent.
Earlier today, the government said the U.S. economy grew at a 2.5 percent annual rate in the third quarter, revised from a 2 percent estimate last month. Economists surveyed by Bloomberg News expect 2.5 percent growth in 2011 and 3.1 percent in 2012, based on median estimates.
Inflation Outlook
Policy makers left forecasts for inflation, excluding food and energy, little changed for the next two years, indicating price increases may lag behind the long-run projection of 1.6 percent to 2 percent for at least two years.
Fed officials gave their first forecasts for 2013, projecting growth of 3.5 percent to 4.6 percent, a fourth- quarter jobless rate of 6.9 percent to 7.4 percent and core inflation of 1.1 percent to 2 percent.
All forecasts reflect the central tendency, which excludes the three highest and lowest projections.
Separately, Fed staff economists raised their U.S. growth forecast for 2011 and 2012 on investor expectations for the Fed’s asset purchases to lower interest rates, boost stock prices and weaken the dollar, giving “additional support to the recovery,” the minutes said.
Plosser, Warsh
On Nov. 16, three regional Fed presidents, Eric Rosengren, James Bullard and Dennis Lockhart, said they expected to buy the entire $600 billion of Treasuries. Plosser said Nov. 18 it’s too early to assume the Fed will complete the purchases, while Warsh said Nov. 8 that the decision wasn’t unconditional or open-ended and that the move is “necessarily limited, circumscribed and subject to regular review.”
John Boehner, nominated to be House speaker, and three other Republicans sent Bernanke a letter Nov. 17 expressing “deep concerns” about a policy they said risked weakening the dollar and fueling asset bubbles.
Also last week, 23 people, including former Republican government officials and economists, urged Bernanke to halt the stimulus, while two Republican lawmakers proposed stripping the Fed of its mandate to promote full employment.
By contrast to the signers of the letter, many of the voices in defense of Bernanke have central banking experience, including Fed vice chairman Alan Blinder, former Bank of England policy maker David Blanchflower and Bank of Israel Governor Stanley Fischer.
The Fed’s second round of unconventional monetary stimulus has boosted inflation expectations and stock prices, while keeping bond yields below their long-term average.
The Standard & Poor’s 500 Index has climbed 11 percent since Aug. 27, the day Bernanke fueled expectations for additional stimulus by saying more securities purchases may be warranted if growth slowed. The yield on the 10-year Treasury note has climbed to 2.78 percent from 2.64 percent, holding below its five-year average of 3.9 percent.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
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