Fed Officials Divided on Stimulus, Disappointed on Job Growth

Fed Reserve Chairman Ben S. Bernanke
Chairman Ben S. Bernanke is trying to spur growth and reduce 9 percent unemployment by bringing about a “sustained period of stronger job creation,” he said this month. Photographer: Andrew Harrer/Bloomberg

Federal Reserve officials differed last month over whether more signs of strength in the U.S. recovery would warrant reducing or slowing record monetary stimulus even as they affirmed disappointment with job growth.

A “few” of the 11 voting members said “additional data pointing to a sufficiently strong recovery” could necessitate changes to a bond purchase plan, the Federal Open Market Committee said in minutes of its Jan. 25-26 meeting released yesterday. “Others pointed out that it was unlikely that the outlook would change by enough to substantiate any adjustments to the program before its completion,” the Fed said.

Policy makers want to complete a $600 billion Treasury purchase plan to meet their congressional mandate for full employment even as they welcome better-than-expected economic reports and a minority voice concerns about the risks of easing, said Dana Saporta, an economist at Credit Suisse Group AG.

“The general consensus on the FOMC is things are better but not good, especially in terms of the jobs picture,” said Saporta, New York-based director of U.S. economics research.

Treasury 10-year note yields rose from the lowest level in more than a week as the minutes showed officials viewed the recovery as being on a “firmer footing.” Yields increased two basis points, or 0.02 percentage point, to 3.62 percent at 5:02 p.m. in New York. The Standard & Poor’s 500 Index rose 0.6 percent to 1,336.32.

Officials “continued to express disappointment in both the pace and the unevenness of the improvements in labor markets,” according to the minutes released in Washington.

Growth Projections

Policy makers during the meeting raised projections for economic growth this year and made few changes to forecasts after 2011 or for unemployment and inflation. Chairman Ben S. Bernanke is trying to spur growth and reduce 9 percent unemployment by bringing about a “sustained period of stronger job creation,” he said this month.

The jobless rate will average 8.8 percent to 9 percent in the fourth quarter, Fed officials projected, down from November forecasts of 8.9 percent to 9.1 percent. For the fourth quarter of 2012, the jobless rate will average 7.6 percent to 8.1 percent, versus the 7.7 percent to 8.2 percent in the previous estimates by policy makers.

The forecasts are based on assumptions from before the Labor Department reported Feb. 4 that the unemployment rate unexpectedly fell to 9 percent in January from 9.4 percent in December. Employers added 36,000 workers last month, the smallest gain since September, as winter weather depressed payrolls.

Household Spending

Central bankers projected U.S. inflation-adjusted gross domestic product will rise 3.4 percent to 3.9 percent, compared with November forecasts of 3 percent to 3.6 percent, as household spending picked up and recent economic data showed a “stronger tenor.”

Support for the second round of so-called quantitative easing was unanimous, according to the minutes. Still, a “few” FOMC voters “remained unsure of the likely effects of the asset purchase program on the economy, but felt that making changes to the program at this time was not appropriate.”

Brian Sack, the New York Fed official in charge of carrying out the central bank’s bond buying, told policy makers the Fed would have to purchase about $80 billion a month to finish the remaining $433 billion in purchases, up from the previously projected pace of $75 billion.

Fed officials may decide to extend the duration of the purchases by tapering off the pace over a couple more months, said Tom Porcelli, chief U.S. economist at RBC Capital Markets Corp. in New York.

Reinvesting Proceeds

After that, they’ll maintain a steady portfolio by reinvesting proceeds of maturing securities, he said. Around the end of this year they’ll take the first tightening step by ending such reinvestment and allowing the balance sheet to shrink, Porcelli said.

“If they do stop, then it’s sort of de facto tightening,” Porcelli said of reinvesting, which the Fed started doing in August.

The FOMC next meets March 15 in Washington. At the December meeting, some Fed officials indicated that “they had a fairly high threshold for making changes to the program” of so-called quantitative easing, according to minutes.

Many Fed officials said that within five or six years the economy was likely to return to longer-run rates of expansion, unemployment and inflation. “A number of participants indicated that they expected that the convergence of the unemployment rate to its longer-run level would require additional time” beyond six years, the minutes said.

Inflation Outlook

Fed officials didn’t expect recent increases in commodity prices to filter into broader inflation permanently, the minutes showed. The Fed’s preferred price index, which excludes food and energy costs, is projected by policy makers to rise 1 percent to 1.3 percent in 2011 and 1 percent to 1.5 percent in 2012. That compares with November’s estimates for core inflation of 0.9 percent to 1.6 percent this year and 1 percent to 1.6 percent in 2012.

Central bankers prefer overall inflation in the longer run of 1.6 percent to 2 percent. The core personal consumption expenditures price index rose 0.7 percent in December from a year earlier, the smallest advance since records began in 1959.