A Few Fed Policy Makers Favored Stronger Move

A few Federal Reserve policy makers favor more aggressive action to stimulate the economy and lower unemployment levels. As one expert says, "the odds are rising that we will see more action to aid the economy..."

By Jeannine Aversa and Scott Lanman
Aug 30, 2011 1:12 PM MT
Bloomberg

A few Federal Reserve policy makers this month favored more aggressive action to stimulate the economy and lower unemployment, minutes of their meeting released today showed.

Those members, who weren’t identified, “felt that recent economic developments justified a more substantial move” beyond the pledge adopted at the Aug. 9 meeting of the Federal Open Market Committee to hold its key interest rate at a record low until mid-2013.

Stocks rallied on bets the minutes indicated growing support among Fed policy makers for further steps to bolster a recovery hobbled by unemployment stuck above 9 percent. Consumer confidence fell to the lowest point in 28 months in August, a report earlier today showed, raising the risk households will cut back on the spending that accounts for 70 percent of the world's largest economy.

Fed officials discussed a range of tools, including buying more government bonds, to bolster the economy, without coming to an agreement on what they might do next should the economy weaken further. They will more fully debate their options when they gather next month for a two-day meeting that was originally scheduled to last one day.

“The odds are rising that we will see more action to aid the economy at the September meeting,” said James O’Sullivan, chief economist at MF Global Inc. in New York.

Next Move

He is among economists who said the Fed’s next move probably will be to replace short-term Treasury securities in its $1.65 trillion portfolio with longer-term securities. That would tend to push down rates on mortgages and other long-term debt.

While Fed policy makers meeting this month didn’t anticipate a recession, several said the recovery was “still somewhat tentative” and was “vulnerable to adverse shocks.”

The Standard & Poor’s 500 Index rose 0.2 percent to 1,212.90 at 4 p.m. in New York after declining as much as 1.2 percent. The yield on the 10-year Treasury note fell to 2.18 percent from 2.26 percent late yesterday.

At the August meeting, the Fed staff cut its estimate for gross domestic product in the second half of 2011. That was the fourth consecutive downward revision to its near-term outlook, the longest series of downward revisions since the recovery began two years ago. The staff also cut its 2012 outlook and lowered its appraisal of the economy’s potential growth rate.

Stock Rout

Fed officials said a stock-market rout leading up to the August meeting “mostly” reflected data pointing to weaker economic growth in the U.S. and around the globe. The stock declines occurred as U.S. lawmakers debated raising the debt limit to avert a possible default and the country’s credit rating was lowered by Standard & Poor’s.

This month’s decision to specify a time period for the Fed’s low-rate pledge, replacing an earlier commitment to keep borrowing costs near zero for an “extended period,” generated the most dissent of Fed Chairman Ben S. Bernanke’s tenure.

Some officials argued that the Fed should have linked its pledge to achieving “explicit values” on the nation’s unemployment rate or an inflation rate.

Doing so would help investors and the public better understand the Fed’s “likely reaction to future economic developments,” they said. Others raised questions about how such a target would be chosen. In the end, the Fed didn’t adopt one.

Excess Reserves

Besides buying government bonds, the Fed could cut the 0.25 percent interest rate it pays bank on the $1.6 trillion in excess reserves parked at the Fed. It also could replace shorter-term securities with longer maturities, which may help lower interest rates on mortgages and other long-term debt. The Fed also could pledge to keep its balance sheet near a record $2.86 trillion for an “extended period” or for a specific time period.

In contrast, some Fed officials “judged that none of the tools available” to the Fed “would likely do much to promote a faster economic recovery,” the minutes said. These officials were concerned that providing additional stimulus would risk boosting inflation without providing a “significant benefit” to bolstering economic growth or lowering unemployment.

The vote at the Aug. 9 meeting was 7-3. Richard Fisher, president of the Dallas Fed, Charles Plosser of Philadelphia and Narayana Kocherlakota of the Minneapolis Fed all dissented. The last time three FOMC voters dissented was on Nov. 17, 1992, under Bernanke’s predecessor, Alan Greenspan.

May Not Dissent

Kocherlakota, in a speech today, signaled he may not dissent again from the 2013 interest-rate pledge on its own.

“Undoing this commitment in the near term would undercut the ability of the committee to offer similar conditional commitments in the future -- and this ability has certainly proved very useful in the past three years,” he said.

Bernanke, in his Aug. 26 speech at the central bank’s Jackson Hole, Wyoming, economic symposium, said the central bank still has tools to boost growth, without specifying what they were or whether they would be deployed.

Last year, the Fed chief used his Jackson Hole speech to lay the groundwork for a second round of bond purchases, also known as quantitative easing. The central bank decided in November to buy $600 billion of Treasuries through June 2011, following the $1.7 trillion first round of purchases that concluded in March 2010.

Policy Limits

The Fed “will certainly do all that it can to help restore high rates of growth and employment in a context of price stability,” Bernanke said last week. At the same time, he said there are limits to how much the Fed can do: “Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” Bernanke said.

The Conference Board said today its consumer-confidence index slumped to 44.5, the weakest since April 2009, from a revised 59.2 reading in July. It was the biggest point drop since October 2008. Low confidence is likely to weigh on consumer spending in the coming months, Fed officials said.

The U.S. government reported Aug. 26 that the world’s largest economy grew less than previously estimated in the second quarter, capping the weakest six months of the recovery that began in mid-2009. Gross domestic product climbed at a 1 percent annual rate, compared with an initial estimate of 1.3 percent growth.

Other economic reports this week on the labor market and manufacturing may point to further weakness in the economy.

Hiring May Slow

Hiring probably slowed in August, with payrolls expanding by 75,000 after an increase of 117,000 in July, according to the median estimate in a Bloomberg News survey of economists ahead of a Sept. 2 Labor Department report. Unemployment stayed at 9.1 percent, according to the survey.

Fed officials noted that “overall labor market conditions had deteriorated in recent months,” the minutes said.

A Sept. 1 report from the Institute for Supply Management may show that manufacturing contracted in August for the first time in two years, according to another Bloomberg survey.

Kelly Services Inc., a provider of temporary staffing services, said this month that its clients are neither scaling back nor planning major increases in near-term hiring.

“It’s clear we have hit a soft patch, but the recovery has not ground to a halt,” Carl T. Camden, chief executive officer of the Troy, Michigan-based company, said on an Aug. 10 conference call. “Although the recovery is slow and somewhat erratic, we believe it is sustainable.”

Undisclosed Meeting

The Fed also held a previously undisclosed Aug. 1 meeting via videoconference to discuss the implications of failing to raise the U.S. debt limit or a downgrade of the nation’s credit rating.

“Participants generally anticipated that there would be no need to make changes to existing bank regulations, the operation of the discount window, or the conduct of open-market operations,” the minutes said.

Standard & Poor’s for the first time lowered its rating on U.S. debt four days later to AA+ from the top grade, AAA.

The Fed also said that inflation had moderated in recent months after being elevated earlier this year. The Fed said there was “little evidence of pricing power among firms” and that “inflation was likely to decline somewhat over time.”

Preferred Gauge

The Fed’s preferred inflation gauge, which excludes food and energy, rose 1.6 percent in July from a year earlier, the Commerce Department said yesterday. That’s the fourth straight monthly acceleration and the fastest since May 2010.

The next FOMC meeting will conclude Sept. 21 instead of starting and finishing Sept. 20. Previous two-day meetings have seen a higher probability of steps to cut borrowing costs, economists at Goldman Sachs Group Inc. (GS) said last week. St. Louis Fed President James Bullard said adding a second day to the September meeting allows more time to review easing options, though rising inflation may prevent action in the near term.

“If the economy is weaker and the inflation picture moderates, we could consider more action,” Bullard said Aug. 26 in a Bloomberg Radio interview in Jackson Hole. “The call is much more difficult this year than last year. We have a much different inflation situation than last year,” when Fed officials were concerned about the risk of a general decline in prices.

The minutes are compiled by the Fed’s Division of Monetary Affairs and approved by all governors and regional Fed presidents.

To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net; Jeannine Aversa in Washington at javersa@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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