Federal Reserve policy makers debated ways to invigorate the recovery and hiring this month, potentially laying the groundwork for action at their next gathering in late September.
Minutes of their closed-door meeting released yesterday in Washington showed that a few members of the Federal Open Market Committee favored a “more substantial move” at the Aug. 9 meeting beyond the pledge adopted by the panel to hold rates at record lows for the next two years.
Stocks rallied on bets the minutes indicated growing support for further steps to bolster a recovery hobbled by unemployment stuck above 9 percent. The Fed may decide at its Sept. 20-21 meeting to replace short-term Treasury securities in its $1.65 trillion portfolio with longer-term bonds in a bid to lower rates on everything from mortgages to car loans, said economists including Michael Feroli at JPMorgan Chase & Co. and Dana Saporta at Credit Suisse.
“The discussion of the various options kind of left you a sense of not whether they are going to do more, but what are they going to do,” said Feroli, chief U.S. economist at JPMorgan Chase in New York and a former Fed economist.
European stocks gained for a third day, with the Stoxx 600 Index climbing 1.3 percent to 233.67 at 9:26 a.m. in London. U.S. stock futures rose, signaling the Standard & Poor’s 500 Index may advance for a fourth day. S&P 500 contracts expiring in September climbed 0.9 percent to 1,215.1. The index increased 0.2 percent yesterday and the yield on the 10-year Treasury note fell to 2.18 percent from 2.26 percent.
Range of Tools
Fed officials this month discussed a range of tools, including buying more government bonds and lengthening the average maturity in its portfolio, without coming to an agreement on what they might do 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 consensus view is that while the Fed doesn’t have all the answers, it could still have a net positive effect” on the economy, said Saporta, U.S. economist at Credit Suisse in New York. “And, I believe that will be the determination at the September meeting.”
Another step the Fed might take would be to lower the 0.25 percent interest rate it pays banks on the $1.6 trillion in excess reserves they keep at the central bank to encourage them to increase lending to consumers and companies. It also could pledge to keep its balance sheet near a record $2.86 trillion for an “extended period” or for a specific time.
Yet some Fed officials “judged that none of the tools available” to the central bank “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” in the form of faster growth or lower unemployment.
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.”
Consumer confidence fell to the lowest point in 28 months in August, a report yesterday showed, raising the risk households will cut back on the spending that accounts for 70 percent of the economy.
“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.
Reports in coming days may provide fresh evidence of economic weakness. 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 probably stayed at 9.1 percent.
Fed staff at the August meeting cut estimates 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.
“Many participants saw increased downside risks to the outlook for economic growth,” the minutes 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, Fed officials said.
To energize a recovery that this year has turned out to be “considerably slower” than anticipated, the Fed in a 7-3 decision agreed to keep its benchmark interest rate at a record low near zero at least until mid-2013.
That marked the first time the central bank made a commitment to hold rates at such levels for a specific time. The new pledge, which replaced an earlier commitment to keep borrowing costs near zero for an “extended period,” generated the most dissent Fed Chairman Ben S. Bernanke has encountered since he took over the central bank in 2006.
Some officials argued that the pledge should have been linked to achieving “explicit values” for unemployment or inflation. 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.
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.