Fed Divided on Need for More Stimulus Amid Signs Economy Gaining Strength
A Few on FOMC Saw Need for More Bond Purchases ‘Before Long’
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Job seekers at a career fair in midtown Manhattan on Feb. 6, 2012.
Job seekers at a career fair in midtown Manhattan on Feb. 6, 2012. Photographer: Spencer Platt/Getty Images
Feb. 16 (Bloomberg) -- Hans-Guenter Redeker, head of global currency strategy at Morgan Stanley, discusses the outlook for the euro and dollar amid central bank liquidity measures in Europe and the U.S. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)
A few members of the Federal Open Market Committee meeting said the central bank may soon have to consider more asset purchases, while others said the economic outlook would have to deteriorate first.
A few members said economic conditions “could warrant the initiation of additional securities purchases before long,” according to minutes of their Jan. 24-25 meeting released today in Washington. “Other members indicated that such policy action could become necessary if the economy lost momentum or if inflation seemed likely to remain” below 2 percent in the medium run.
The central bank said at its meeting last month that it plans to hold interest rates near zero at least through late 2014 to spur growth and reduce unemployment, extending a previous date of mid-2013. Fed Chairman Ben S. Bernanke has since repeated the pledge, which was made before a report this month showing that the jobless rate fell to a three-year low of 8.3 percent in January.
Policy makers said it was unlikely that the Fed would soon begin reducing the size of its balance sheet by selling some of the Treasury and mortgage bonds amassed in the course of two rounds of large-scale asset purchases.
“Most participants saw sales of agency securities starting no earlier than 2015,” said the minutes, which included, for the first time, “qualitative information regarding participants’ expectations for the Federal Reserve’s balance sheet.”
Factory Production
Economic data since the Fed meeting have pointed to strength in the world’s largest economy. A Fed report earlier today showed output at factories increased 0.7 percent after a revised 1.5 percent gain in December, reflecting gains in demand for automobiles and business equipment that may keep manufacturing at the forefront of the expansion.
“The bias at the time of the meeting was clearly for additional asset purchases,” said Dan Greenhaus, chief global strategist for BTIG LLC in New York. “The improvement in various indicators since the time of the last meeting probably means that for the average FOMC member the appetite for additional purchases is lower.”
A Feb. 3 report from the Labor Department showed employers added 243,000 jobs to payrolls last month, exceeding the most optimistic forecast in a Bloomberg Survey of 89 economists.
‘Exceptionally Low’
The minutes said “almost all members agreed to indicate” that economic conditions would warrant an “exceptionally low” federal funds rate level “at least through late 2014.” The minutes said “several members” anticipated that unemployment would still be higher than their estimates of its longer-term normal rate, and inflation would be at or below the committee’s longer-run objective of 2 percent, in late 2014.
U.S. stocks extended declines amid concern Greece was moving closer to default. The Standard & Poor’s 500 Index lost 0.6 percent to 1,342.39 at 3:09 p.m. in New York. The index is up more than 6 percent this year on evidence of a strengthening economy. The yield on the 10-year Treasury note fell was little changed at 1.93 percent.
Fed policy makers said forward guidance on the federal funds rate would help provide more accommodative financial conditions. Still, “some members” said the rate outlook “would be subject to revision” in response to significant changes in the economic outlook.
Interest-Rate Path
For the first last month, policy makers published their own projections for the path of the Fed’s target interest rate. The central bank also announced a goal to hold inflation to 2 percent, along with a pledge to return the economy to maximum employment, which it currently sees as a jobless rate between 5.2 percent and 6 percent.
All FOMC members voted to adopt the Fed’s statement of its goals except Governor Daniel Tarullo, who abstained because he “questioned the usefulness of the statement in promoting better communication of the committee’s policy strategy.”
The Fed said the statement of goals would be reaffirmed every year and “the bar for amending the statement would be high,” according to the minutes.
Bernanke told the Senate Budget Committee on Feb. 7 that the decline in the jobless rate veils weaknesses in the labor market.
Actively Seeking Work
“It is very important to look not just at the unemployment rate, which reflects only people who are actively seeking work,” Bernanke said in response to a lawmaker’s question during his testimony. “There are also a lot of people who are either out of the labor force because they don’t think they can find work” or who have taken part-time jobs.
A measure of underemployment, which includes people working part-time jobs while seeking full-time employment, was at 15.1 percent in January.
“A few participants noted that the recent decline in the unemployment rate reflected declining labor force participation in large part, and judged that the decline in the participation rate was likely to be reversed, at least to some extent, as the recovery continues and labor demand picks up,” according to the minutes.
Policy makers also said that “financial conditions improved and financial-market stresses eased somewhat” since their December meeting, crediting the European Central Bank’s three-year refinancing operation and saying that continued actions would be necessary in Europe.
Jobless Rate
The Fed’s economic forecasts, released on Jan. 25 following their meeting, show the unemployment rate falling to a range of 8.2 percent to 8.5 percent at the end of 2012 and 7.4 percent to 8.1 percent at the end of the following year.
Policy makers see economic growth of 2.2 percent to 2.7 percent in 2012 and 2.8 percent to 3.2 percent in 2013. Both estimates were revised downward from forecasts made in November.
The central bank announced its 2 percent inflation target even as its forecasts showed it would fall short of that goal. Most policy makers see inflation of 1.4 percent to 1.8 percent in 2012, as measured by the personal consumption expenditures price index.
The Fed joined at least 12 other central banks from New Zealand to Sweden in specifying its inflation target. Unlike many of its counterparts, the U.S. central bank must also follow a congressional mandate to promote full employment, or the maximum amount of jobs created before firms bid up wages.
The Fed, seeking to fuel growth and avert deflation, pushed interest rates to zero in December 2008 and has purchased $2.3 trillion of bonds. In September, it announced plans to replace $400 billion of short-term Treasuries with longer-term Treasuries in another effort to drive down interest rates.
“If the situation continues with inflation below target and unemployment declining at a rate which is very, very slow, then the logic of our framework says we should be looking for ways to do more,” Bernanke, 58, said during his Jan. 25 press conference.
To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net;
Craig Torres in Washington at ctorres3@bloomberg.net;
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
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