Federal Reserve policy makers last month differed over whether to begin removing record stimulus this year as they debated the path of monetary policy after the completion of their $600 billion bond-purchase program.
“A few participants indicated that economic conditions might warrant a move toward less-accommodative monetary policy this year; a few others noted that exceptional policy accommodation could be appropriate beyond 2011,” the Federal Open Market Committee said in minutes of its March 15 meeting, released today in Washington. “Almost all” Fed officials also saw no need to “taper” Treasury buying after June, jettisoning their prior strategy of reducing the pace of purchases while stretching out their duration.
Since the meeting, the labor market and inflation readings have picked up while growth in service industries slowed. Some regional Fed presidents who were skeptical of the monetary stimulus have talked about the need to tighten credit, and Chairman Ben S. Bernanke has yet to indicate his preference for the Fed’s next move after finishing the bond buying.
While the decision to continue the purchases was unanimous, the Fed said a few of the 10 voting members of the committee thought evidence of a stronger recovery, higher inflation and rising inflation expectations “could make it appropriate to reduce the pace or overall size of the purchase program.” The minutes said that “several others” said they “did not anticipate making adjustments.”
U.S. stocks pared gains following the release of the minutes. The Standard & Poor’s 500 Index was up 0.1 percent to 1,333.75 at 3:24 p.m. in New York after trading as high as 1,338.21 earlier in the day. The yield on the 10-year Treasury note climbed to 3.487 percent in New York, up from 3.42 percent yesterday.
“I don’t think we’re going to get a fast or abrupt change in policy,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, on Bloomberg Radio’s “The Hays Advantage.”
“But clearly the center of gravity, I think, is starting to slowly but surely shift to a more hawkish bent as the inflation data start to pick up a little bit,” said Stanley, a former Fed researcher, using a term for Fed officials who are more inclined to tighten credit to fight price increases.
In releases since the Fed’s meeting, the Commerce Department reported that the central bank’s preferred price measure, which excludes food and fuel, was up 0.9 percent from a year earlier in February, the most since October. Including all items, prices rose 1.6 percent, compared with a 1.2 percent 12- month increase through January, the biggest monthly increase since December 2009.
“Clearly a number of them are starting to feel queasy about the prospects for inflation,” Nariman Behravesh, chief economist in Lexington, Massachusetts, at research group IHS, said in an interview on Bloomberg Television.
Several FOMC members “indicated, in light of recent developments, that the risks to their forecasts of inflation had shifted somewhat to the upside,” according to the minutes.
The Labor Department reported last week the economy added a greater-than-forecast 216,000 jobs in March, and the unemployment rate fell to 8.8 percent, the lowest in more than two years. Earlier today, a report showed service industries expanded less than forecast in March, a sign the biggest part of the economy is trailing the gains in manufacturing.
Bernanke said last night in Stone Mountain, Georgia, that policy makers must watch inflation “extremely closely” for evidence that rising commodity costs are having more than a temporary impact on consumer prices.
At their March meeting, committee members anticipated the effects of rising commodity prices would be “transitory, in part because they saw longer-term inflation expectations remaining stable.”
Last week, New York Fed President William C. Dudley countered suggestions by other policy makers, including Philadelphia Fed President Charles Plosser and Minneapolis Fed President Narayana Kocherlakota, that the central bank may need to consider raising interest rates this year.
Faster-than-expected payroll growth in March shouldn’t alter the Fed’s plans to buy $600 billion in Treasuries through June, said Dudley, who serves as FOMC vice chairman.
The Fed’s reluctance to tighten credit now contrasts with some of its counterparts. European Central Bank policy makers have signaled that they may raise their benchmark interest rate from a record low of 1 percent when they next meet April 7 because euro-area inflation is breaching the 2 percent limit.
China raised borrowing costs today for the fourth time since the global financial crisis to limit the risk of asset price bubbles in the world’s fastest-growing major economy. The benchmark one-year lending rate will increase to 6.31 percent from 6.06 percent effective tomorrow, the People’s Bank of China said on its website. The one-year deposit rate will rise to 3.25 percent from 3 percent.
At the meeting, Brian Sack, the New York Fed’s markets group chief, gave a presentation on whether to taper the Fed’s bond purchases and concluded that “the greater depth and liquidity of the Treasury securities market suggested that it would not be necessary to taper purchases,” the minutes said.
Four Days After
Fed policy makers met on March 15, just four days after Japan was hit with a 9.0-magnitude earthquake and tsunami that left more than 27,000 people dead or missing and more than 150,000 others living in evacuation centers.
Fed policy makers thought “the economic implications of the tragedy in Japan -- for example, with respect to global supply chains -- were not yet clear,” the minutes said, and that the disaster in Japan and turmoil in the Middle East “had further increased uncertainty about the economic outlook.”
The rise in oil prices accelerated after armed conflict broke out in Libya, which was Africa’s third-largest oil producer. Output there slumped to a “trickle” by March 11, according to the International Energy Agency.
The national average price of regular gasoline rose to $3.55 a gallon on March 15 from $3.07 on January 1. Gasoline rose further after the Fed’s meeting and was $3.69 yesterday.
Policy makers said that the rising prices “posed upside risks to the stability of longer-term inflation expectations, and thus to the outlook for inflation, even as they posed downside risks to the outlook for growth in consumer spending and business investment,” the minutes said.
Improving demand is encouraging some companies to take on more employees, cushioning earlier cutbacks. General Motors Co. will recall the last of its laid-off workers by September, United Auto Workers Vice President Joe Ashton said in March.
Fed staff economists at the meeting gave a forecast for a “moderate pace” of 2011 and 2012 growth similar to projections at the last session in January, while lowering their forecast for the unemployment rate. Even so, “the jobless rate was still expected to decline slowly and to remain elevated at the end of 2012,” the minutes said.
Staff economists raised their projection for near-term consumer price inflation while seeing the increase as “mostly transitory if oil and other commodity prices did not rise significantly further,” the minutes said. The forecast for prices in the “medium run” was little changed from January.
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