Fed Tilts toward More Easing

Many on FOMC favored additional stimulus soon if there’s no sustained gain in growth.

Many Federal Reserve policy makers said additional stimulus would probably 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.

Policy makers said 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. 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.

Many participants at the Fed’s meeting said that a new large-scale asset-purchase program “could provide additional support for the economic recovery.”

The minutes also reflected discussion of the merits of purchasing Treasury securities relative to 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 pared declines after the release of the minutes, falling 0.3 percent to 1,409.35 as of 2:23 p.m. in New York after declining as much as 0.5 percent. The yield on the 10-year Treasury decreased 0.08 percentage point to 1.71 percent.

“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.

 

2014 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 show the FOMC 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.

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.

The brighter data has helped push the S&P 500 to six straight weekly gains and to almost a four-year high.

Atlanta Fed President Dennis Lockhart, an FOMC voter this year, 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.

 

Enough Already

Dallas Fed President Richard Fisher, who doesn’t vote on policy this year, said on Aug. 8 the Fed has already provided sufficient economic stimulus.

“There’s a growing perception right now that the economy isn’t that bad even though it’s not as good as people would like,” said Bluford Putnam, the chief economist at CME Group Inc., the Chicago-based owner of the world’s largest futures market.

“If the data improve, then the Fed can look eventually toward normalizing monetary policy,” said Putnam, a former economist at the Federal Reserve Bank of New York. He spoke before release of the minutes.

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.

Those reports reduce the chance the FOMC will announce a third round of quantitative easing at its next meeting because “continued weakness is necessary to prompt a substantial easing move,” according to a report from Goldman Sachs Group Inc. Chief Economist Jan Hatzius.

“U.S. economic data continue to look a bit stronger,” the New York-based economist wrote Aug. 14. Still, a “very solid case” for more accommodation remains, and the Fed will probably decide to ease policy after next month’s meeting.

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. Williams holds a vote on the FOMC this year, while Rosengren doesn’t.

 

Jobless Rate

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.

The U.S. expansion faces headwinds from a faltering world economy. The International Monetary Fund last month cut its 2013 global growth forecast as Europe’s debt crisis prolongs Spain’s recession and weighs on emerging markets from China to India.

Chicago Fed President Charles Evans said to reporters today in Beijing that a weakening in global trade is “awful.”

In the short term, global economic growth will probably hold steady, according to Frank Calderoni, chief financial officer for Cisco Systems Inc., the biggest maker of computer- networking equipment.

The San Jose, California-based company forecasts “neither a significant improvement nor a deterioration in global macro- economic conditions in the near future,” Calderoni said on a conference call with analysts. Cisco soared 9.6 percent on Aug. 16 after posting profit and sales that topped analysts’ estimates.

 

Bloomberg News

 

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