Many on FOMC Favored Easing Soon if No Pickup in Growth
Many Federal Reserve policy makers said additional stimulus probably will be needed soon unless the economy shows signs of a durable pickup, according to minutes of their most recent meeting.
“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” according to the record of the Federal Open Market Committee’s July 31- Aug. 1 gathering released today in Washington.
U.S. stocks and bonds rose as investors saw greater odds the central bank will increase accommodation. Chairman Ben S. Bernanke will have an opportunity to clarify his views in an Aug. 31 speech at a forum for central bankers in Jackson Hole, Wyoming, where he signaled a second round of bond buying by the Fed in 2010. Fed officials next meet on Sept. 12-13.
“They’re closer to doing QE3 than I would have guessed,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, referring to a third round of bond purchases known as quantitative easing. “It may not be September. It could be October.”
Many participants at the Fed’s meeting said a new large- scale asset-purchase program “could provide additional support for the economic recovery,” according to the minutes. Policy makers said in a statement after the meeting that they will step up record stimulus if needed to spur growth and cut a jobless rate stuck above 8 percent since February 2009.
The minutes also noted a discussion on the merits of purchasing Treasury securities compared with mortgage-backed securities. While “some” members worried about the impact on debt markets, a staff analysis showed “substantial capacity for additional purchases without disrupting market functioning.”
Policy makers, who said in their Aug. 1 statement that economic conditions “warrant exceptionally low levels for the federal funds rate at least through late 2014,” discussed extending the duration for how long they will keep the main interest rate near zero, the minutes show.
The Standard & Poor’s 500 Index (SPX) erased losses, adding less than 0.1 percent to 1,413.49 at the close of trading in New York after falling as much as 0.5 percent before the release of the minutes. The yield on the 10-year Treasury note tumbled 11 basis points, or 0.11 percentage point, to 1.69 percent in the biggest intraday decline since June 1.
Since the FOMC meeting, some U.S. economic data have exceeded expectations, with retail sales increasing in July and employers adding 163,000 jobs, the most in five months. Industrial production and consumer confidence also rose, and a report today showed sales of existing homes climbed in July from an eight-month low.
In the discussion of pushing back the time horizon for low interest rates, “it was noted that such an extension might be particularly effective if done in conjunction with a statement indicating that a highly accommodative stance of monetary policy was likely to be maintained even as the recovery progressed,” according to the minutes.
The Fed reduced its key interest rate almost to zero in December 2008 and has since engaged in two rounds of large-scale asset purchases totaling $2.3 trillion.
Questions on Guidance
Participants questioned whether the guidance was clear enough, and “a few” suggested that the committee replace the date with changes in the economy that would prompt policy makers to raise the fed funds rate, or cut guidance language entirely, the minutes show.
Policy makers “agreed to defer a decision on this matter” until the September meeting when they will update their economic forecasts, the minutes said.
All of the Fed’s 12 regional presidents and seven Washington-based governors are participants in meetings of the FOMC.
The FOMC members are the 12 participants with the power to vote on policy. The governors, the New York Fed President and a rotating group of four of the regional presidents serve as voting members of the committee. This year, the Cleveland, Richmond, Atlanta and San Francisco Fed Presidents hold a vote.
The minutes show the committee also discussed other options for boosting stimulus, including cutting the interest rate paid on reserves banks keep at the Fed.
“While a couple of participants favored such a reduction, several others raised concerns about possible adverse effects on money markets,” the minutes said.
A couple of Fed members also “expressed interest” in exploring programs similar to the Bank of England’s Funding for Lending Scheme which seeks to encourage lending to households and firms.
The minutes show the FOMC continuing to discuss the ways they communicate with the public about policy. The Fed’s staff presented research on so-called monetary policy rules that would guide Fed action.
The subcommittee on communications developed an “experimental exercise” to see whether the committee could present a “consensus forecast” of the committee’s views.
Atlanta Fed President Dennis Lockhart said yesterday the committee faces a risk of easing too much while trying to energize a “disappointing” three-year-old recovery. In contrast, he said last month that weak economic data increased the odds he would back more Fed purchases of bonds known as quantitative easing to cut borrowing costs.
Dallas Fed President Richard Fisher said on Aug. 8 the Fed has already provided sufficient economic stimulus.
Retail sales rose 0.8 percent in July, the biggest gain since February and first increase in four months, the Commerce Department said Aug. 14. A separate report the same day showed that inventories at U.S. companies rose in June at the slowest pace in nine months.
Boston Fed President Eric Rosengren and John Williams of San Francisco have called since the FOMC meeting for additional stimulus to jump-start growth and reduce unemployment. Rosengren told CNBC on Aug. 7 that policy makers should pursue an “open- ended” program of bond purchases known as quantitative easing.
Williams said in an interview with the San Francisco Chronicle that weakening employment, consumer spending and economic growth suggest the Fed should begin a third round of bond purchases.
Record Fed stimulus has failed to bring about a sustained decline in the jobless rate, which climbed in July to 8.3 percent, the same level as January. The pace of payrolls growth slowed to an average of 73,000 a month in the second quarter compared with an average of 226,000 in the first quarter.
Policy makers are concerned economic growth is too weak to buoy the job market. The world’s largest economy will probably expand 1.8 percent in the third quarter and 2.1 percent in the final quarter, according to the median of 75 estimates in a Bloomberg survey. Gross domestic product grew 2 percent in the first quarter of this year before decelerating to 1.5 percent from April until June.
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