Some Federal Reserve Officials Sought to Retain Option of QE3, Minutes Say
The Federal Reserve said some officials last month wanted to keep further asset purchases as an option to boost the economy as policy makers saw “considerable uncertainty” that U.S. growth will pick up.
Most participants favored giving additional information on the central bank’s goals and how they influence the Fed’s decisions, and most “saw advantages” in tying the Fed’s near- zero interest rates to more specific developments in the economy, the Fed said in minutes of the Sept. 20-21 session, released today in Washington. Such changes may be expressed in ways other than the post-meeting statement, the Fed said.
The debate culminated in the Federal Open Market Committee’s decision to replace $400 billion of Treasuries in the central bank’s portfolio with longer-term debt to reduce borrowing costs. Three officials dissented. Chairman Ben S. Bernanke said last week the so-called Operation Twist program is a “significant step but not a game changer” for reviving growth and reducing unemployment stuck near 9 percent.
“A number of participants saw large-scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted,” the minutes said.
Policy makers also decided on Sept. 21 to reinvest maturing housing debt into mortgage-backed securities in part to keep the Fed’s Treasury holdings from getting too large and possibly causing a “deterioration in Treasury market functioning,” the minutes said.
Benchmark Interest Rate
The FOMC left its benchmark rate in a range of zero to 0.25 percent, where it’s been since December 2008, and reiterated its language from its August meeting that the rate is likely to stay very low through at least mid-2013.
The Standard & Poor’s 500 Index of stocks pared gains, rising 1 percent to 1,207.25 at 4:41 p.m. in New York. Yields on 10-year Treasuries climbed 6 basis points, or 0.06 percentage point, to 2.21 percent.
Fed officials also considered a weaker version of Operation Twist that would reinvest principal payments on housing debt exclusively in long-term Treasury securities, the minutes said. Policy makers discussed lowering the 0.25 percent interest rate paid on banks’ reserve deposits with the Fed; many officials expressed concern that such a move “risked costly disruptions to money markets and to the intermediation of credit.”
Additional asset purchases would constitute a third round of so-called quantitative easing after the Fed bought $2.3 trillion in housing and government debt in two rounds from December 2008 to June 2011. Some officials said expanding the Fed’s balance sheet further “would be more likely to raise inflation and inflation expectations than to stimulate economic activity and argued that such tools should be reserved for circumstances in which the risk of deflation was elevated,” the minutes said.
Philadelphia Fed President Charles Plosser, one of the dissenters, said after a speech today in Philadelphia that the threat of deflation would warrant more stimulus. He said Operation Twist won’t have a “major impact” on the speed of the economic recovery and that he expects U.S. growth to “gradually accelerate” to about 3 percent next year.
As for the option of additional asset purchases, “it’s there, it’s possible, but it’s a high hurdle,” Michael Moran, chief economist at Daiwa Capital Markets America Inc. in New York, said in an interview with Bloomberg Television. “Most FOMC members are going to view that as a tool that should be reserved for if the economy were to start to decline or if we were to get into a situation where deflation is a risk,” he said.
At the August meeting, Bernanke and colleagues discussed adopting specific levels of inflation and unemployment as conditions for keeping interest rates near zero. Only Chicago Fed President Charles Evans has publicly supported the idea of allowing price increases faster than 2 percent annually as a way to lower unemployment.
The September minutes said that most participants “favored taking steps to increase further the transparency of monetary policy.” Some committee members said it would be “useful” to clarify the link between monetary-policy decisions in the short term and longer-run objectives.
A number of participants “expressed concerns” about communicating an objective for the unemployment rate because of monetary policy’s indirect influence over labor markets. The Fed panel agreed that the long-run rate of inflation is determined by monetary policy. The minutes stopped short of saying the Fed was prepared to set an explicit inflation target.
“Participants generally saw the committee’s post-meeting statements as not well suited to communicate fully the committee’s thinking about its objectives and its policy framework,” the minutes said. They agreed that they would need to use “other means” to supplement the statement, without specifying what those could be.
The Fed also discussed giving more information on the conditions under which interest rates would stay close to zero, which could make the statement “more effective” and provoke a more favorable response in financial markets, the minutes said.
Several officials saw a risk that such information “could be mistaken” for a statement of the Fed’s longer-run objectives, and some said the central bank’s Summary of Economic Projections, published four times a year, could be used to provide more details.
Fed Governor Sarah Bloom Raskin said Sept. 27 that she will be “quite leery” of allowing inflation or price expectations to rise in an attempt to lower real interest rates. St. Louis Fed President James Bullard said the same day that faster inflation won’t reduce the housing glut.
U.S. employers added 103,000 jobs last month, more than economists forecast, while the jobless rate held at 9.1 percent, the Labor Department said Oct. 7. Job gains have slowed for two straight quarters.
Bernanke said at a Joint Economic Committee hearing Oct. 4 that the two-year-old recovery is “close to faltering.” The U.S. economy expanded at a 1.3 percent annual pace in the second quarter, up from 0.4 percent in the first quarter.
Fed staff economists reduced their forecast for growth in the second half of 2011 “and in the medium term,” the minutes said, without giving specific figures. That was the staff’s fifth consecutive downward revision to the near-term outlook, and the third consecutive revision to the medium-term forecast. Fed governors and regional presidents last gave economic projections in June and will publish revisions Nov. 2.
Relapse Into Recession
Sixty percent of respondents to last month’s Bloomberg Global Poll see the U.S. economy deteriorating, and 50 percent said it will relapse into recession in the next year. Seventy- eight percent of respondents said the Fed’s Operation Twist won’t produce job growth.
Many policy makers at the meeting judged that inflation risks were “roughly balanced,” and officials “generally judged that there was relatively little risk of deflation,” the minutes said. The Fed’s preferred price index, which excludes food and fuel costs, rose 1.6 percent in August from a year earlier, up from 1 percent in March.
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