The Federal Reserve is holding off on increasing monetary accommodation unless the U.S. economic expansion falters or prices rise at a rate slower than its 2 percent target.
“A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below” 2 percent, according to minutes of their March 13 meeting released today in Washington. That contrasts with the assessment at the FOMC’s January meeting in which some Fed officials saw current conditions warranting additional action “before long.”
Stocks slumped while the dollar and Treasury yields rose. The Standard & Poor’s 500 Index lost 0.4 percent to 1,413.31 as of 4:12 p.m. in New York, retreating from yesterday’s highest close since May 2008. Yields on 10-year Treasury notes increased 11 basis points to 2.3 percent. The Dollar Index, a gauge of the currency against six major peers, rallied 0.7 percent.
The March minutes show decreased urgency to add stimulus with no sentiment expressed for additional easing without a deterioration in economic conditions. The central bank also affirmed its plan, first announced in January, to hold interest rates near zero through late 2014 as the economy’s improvement may not be sufficient to lower the outlook for coming years.
Asian stocks fell for the first time in four days, with the MSCI Asia Pacific Index sliding 0.9 percent as of 10:51 a.m. in Tokyo.
“I would have to see some pretty severe circumstances before I endorse for another round of quantitative easing,” Atlanta Fed President Dennis Lockhart said today on Bloomberg Radio’s “Hays Advantage” with Kathleen Hays. “The outlook is positive enough that I am not sure I see the need for it.”
Lockhart, a voting member on monetary policy this year, has never dissented from a decision of the FOMC since becoming president of the Atlanta Fed in March 2007.
Markets reacted sharply because investors expected a signal for new rounds of quantitative easing, said Michael Gapen, a former Fed economist who is a senior U.S. economist at Barclays Capital Inc. in New York.
“There were others who were convinced the Fed was going to have to do it and some QE was still priced in,” Gapen said. Today’s minutes don’t “rule out QE3 - the Fed still thinks there are downside risks to remain concerned about -- but the trends right now don’t suggest they need to do more,” he said.
The central bank first said in January that it may hold interest rates near zero through at least late 2014 as the economy may fail to grow fast enough to continue bringing down the unemployment rate. Fed Chairman Ben S. Bernanke has defended the pledge as appropriate since the meeting, saying that despite some improvement in the economy it’s “far too early to declare victory.”
The FOMC said in March that unemployment is still “elevated” even after recent improvements in the job market. Richmond Fed President Jeffrey Lacker dissented because he doesn’t anticipate that economic conditions will warrant exceptionally low rates for so long.
Fed policy makers also discussed the conditions under which they’d alter their 2014 interest rate plan. That commitment is conditional on the performance of the economy “and members concurred that the date given in the statement would be subject to revision in response to significant changes in the economic outlook,” the minutes said.
“A number” of policy makers did not see that threshold being met and said that “while recent employment data had been encouraging” there was a “nonnegligible risk that improvements in employment could diminish as the year progressed,” the minutes said.
Bernanke highlighted those risks in a March 27 television interview with ABC News.
“We need to be cautious and make sure this is sustainable,” he said in the interview. “We haven’t quite yet got to the point where we can be completely confident that we’re on a track to full recovery.”
Asked if another round of quantitative easing, or large-scale bond purchases, remains “on the table,” the 58-year-old Fed chief said, “we don’t take any options off the table.”
“We have to be prepared to respond to however the economy evolves,” he said.
Those remarks expanded on a speech by Bernanke on March 26 in Arlington, Virginia, in which he said the fall in the jobless rate may reflect “a reversal of the unusually large layoffs that occurred during late 2008 and over 2009.” Significant improvement in reducing unemployment will probably require faster growth, he said.
In their March discussion policy makers did not see the economy growing so strongly that they would have to raise their forecasts in coming years.
“Most participants did not interpret the recent economic and financial information as pointing to a material revision to the outlook for 2013 and 2014,” the minutes said.
FOMC participants also discussed additional steps they could take to better explain to the public how changes in the economic outlook affect monetary policy decisions, such as what qualitative or quantitative data would prompt which actions, according to the minutes.
“Several participants suggested that it could be helpful to discuss at a future meeting some alternative economic scenarios and the monetary policy responses that might be seen as appropriate under each one,” according to the minutes, which noted no decision was made on future steps on the Fed’s communication strategy.
Higher Gas Price
The best six months of job growth since 2006, unemployment at a three-year low, and stock-market gains are giving Americans the means to withstand a higher gasoline price. A March 30 report from the Commerce Department said Americans increased their spending by the most in seven months, with purchases climbing 0.8 percent in February.
“Consumers are becoming a little bit more resilient to fuel prices,” Don Johnson, U.S. sales chief for General Motors Co., said yesterday on Bloomberg Television’s “In The Loop With Betty Liu.” More consumers will be spurred to replace old cars, he said, “as the economy continues to strengthen, which it has been recently, more and more of that pent-up demand will be released into the market.”