–Updating 14:11 ET Story; More Details
By Steven K. Beckner
(MNI) – Although Federal Reserve policymakers decided not to pump
more money into the economy early this month, minutes of their meeting
show there was considerable support for providing additional monetary
stimulus if the economy did not show substantial improvement.
The minutes show the Fed’s policymaking Federal Open Market
Committee stayed on hold August 1st because the FOMC had taken fresh
steps to spur the economy in late June and wanted more time to see their
impact.
But among the 19 members of the committee, “a number” felt that
more Fed easing could help reduce unemployment. And “many” members
thought additional monetary stimulus “would like be warranted fairly
soon” unless there is a “substantial and sustained strengthening” of
economic growth.
Since the meeting, there have been some better economic signs, but
they’ve been mixed, and domestic and international headwinds remain. The
FOMC meets again Sept. 12-13.
Amid signs of “deceleration” in economic activity, minutes show
that the FOMC discussed a full range of policy tools, but most of the
focus was on asset purchases and communication, i.e. the FOMC’s “forward
guidance” on the future path of the federal funds rate.
“Many” participants thought a third round of quantitative easing
(“QE3″) could support economic growth, and “some” thought it would also
boost confidence.
There also seems to have been much sentiment for extending the
period of zero federal funds rates — and possibly for enhancing its
effectiveness by stating that the funds rate would stay very low “even
as the recovery progressed.”
There was support for replacing the calendar date with some kind of
economic trigger, but not a majority.
Other tools — cutting the interest rate on excess reserves (IOER)
and subsidized discount window lending — garnered only “a couple” of
supporters.
The FOMC disappointed some when it decided Aug. 1 not to ease
monetary policy further, while continuing to say it expects to keep the
federal funds rate near zero “at least through late 2014″ and
reaffirming its “Operation Twist” program of pushing down long-term
rates through the sale of short-term and purchase of long-term
securities.
The FOMC then enhanced its easing bias, saying, “The Committee will
closely monitor incoming information on economic and financial
developments and will provide additional accommodation as needed to
promote a stronger economic recovery and sustained improvement in labor
market conditions in a context of price stability.”
Since then, Fed watchers’ expectations of additional easing have
waxed and waned, but for the most part economic and financial
developments have been seen as diminishing the odds of further easing.
The minutes make clear why the FOMC decided to delay acting and
what kinds of conditions would be required to induce action.
“The Committee had provided additional accommodation at its
previous meeting by announcing the continuation of the maturity
extension program through the end of the year, and more time was seen as
necessary to evaluate the effects of that decision,” the minutes
explain.
“Nonetheless,” they add, “many members expected that at the end of
2014, the unemployment rate would still be well above their estimates
of its longer-term normal rate and that inflation would be at or below
the Committee’s longer-run objective of 2%.”
And so “a number of them indicated that additional accommodation
could help foster a more rapid improvement in labor market conditions in
an environment in which price pressures were likely to be subdued.”
What’s more, the minutes reveal that “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.”
The minutes also disclose that “several members noted the benefits
of accumulating further information that could help clarify the contours
of the outlook for economic activity and inflation as well as the need
for further policy action.”
Only one voting member — presumably dissenting Richmond Fed
President Jeffrey Lacker — “judged that additional accommodation would
likely not be effective in improving the economic outlook and viewed the
potential costs associated with such action as unacceptably high.” Other
non-voting participants are known to harbor similar views, as shown last
week in MNI’s interview with Dallas Fed President Richard Fisher.
Also significant is the minutes’ description of FOMC discussions of
its policy arsenal.
“Participants discussed a number of policy tools that the Committee
might employ if it decided to provide additional monetary accommodation
to support a stronger economic recovery in a context of price
stability,” beginning with “an extension of the period over which the
Committee expected to maintain its target range for the federal funds
rate at 0 to 1/4 percent.”
The FOMC didn’t just discuss stretching the “lift-off” date for
the federal funds rate past late 2014 but also talked about ways to
alter the “forward guidance” with language that would strengthen the
implied commitment and address Fed watcher concerns about its
credibility.
“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,” the minutes say.
“Given the uncertainty attending the economic outlook, a few
participants questioned whether the conditionality of the forward
guidance was sufficiently clear, and they suggested that the Committee
should consider replacing the calendar date with guidance that was
linked more directly to the economic factors that the Committee would
consider in deciding to raise its target for the federal funds rate, or
omit the forward guidance language entirely.
The FOMC participants also “exchanged views on the likely benefits
and costs of a new large-scale asset purchase program.”
“Many participants expected that such a program could provide
additional support for the economic recovery both by putting downward
pressure on longer-term interest rates and by contributing to easier
financial conditions more broadly,” the minutes say. “In addition, some
participants noted that a new program might boost business and consumer
confidence and reinforce the Committee’s commitment to making sustained
progress toward its mandated objectives.”
The minutes show that the FOMC also discussed “the merits of
purchases of Treasury securities relative to agency MBS.”
Views varied, and there was vehement opposition from some
participants.
While some favored a QE3, “others questioned the possible efficacy
of such a program under present circumstances, and a couple suggested
that the effects on economic activity might be transitory.”
“In reviewing the costs that such a program might entail, some
participants expressed concerns about the effects of additional asset
purchases on trading conditions in markets related to Treasury
securities and agency MBS, but others agreed with the staff’s analysis
showing substantial capacity for additional purchases without disrupting
market functioning,” the minutes say.
“Several worried that additional purchases might alter the process
of normalizing the Federal Reserve’s balance sheet when the time came to
begin removing accommodation,” they go on, and “a few participants were
concerned that an extended period of accommodation or an additional
large-scale asset purchase program could increase the risks to financial
stability or lead to a rise in longer-term inflation expectations.”
There seems to have been considerable support for making a QE3,
should it be launched, less predetermined and more incremental than its
predecessors: “Many participants indicated that any new purchase program
should be sufficiently flexible to allow adjustments, as needed, in
response to economic developments or to changes in the Committee’s
assessment of the efficacy and costs of the program.”
Validating a recent MNI sources story, the minutes reveal that
there was relatively little support for cutting the IOER or resorting to
targeted discount window lending.
“Some participants commented on other possible tools for adding
policy accommodation, including a reduction in the interest rate paid on
required and excess reserve balances,” say the minutes. But “while a
couple of participants favored such a reduction, several others raised
concerns about possible adverse effects on money markets.”
“It was noted that the ECB’s recent cut in its deposit rate to zero
provided an opportunity to learn more about the possible consequences
for market functioning of such a move.”
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** MNI **
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