Fed pondered radical steps to support recovery

WASHINGTON Tue Nov 23, 2010 4:39pm EST

Ben Bernanke, Chairman of the U.S. Federal Reserve Board delivers his keynote speech at the sixth European Central Bank (ECB) Central Banking conference in Frankfurt, November 19, 2010. REUTERS/Kai Pfaffenbach

Ben Bernanke, Chairman of the U.S. Federal Reserve Board delivers his keynote speech at the sixth European Central Bank (ECB) Central Banking conference in Frankfurt, November 19, 2010.

Credit: Reuters/Kai Pfaffenbach

WASHINGTON (Reuters) - A weaker economic outlook prompted Federal Reserve officials to consider more radical steps to aid the economy before settling on $600 billion in bond purchases earlier this month.

Minutes released on Tuesday of a Fed meeting showed a resolute but divided central bank. Policymakers sharply revised down their forecasts for economic growth next year and saw unemployment at significantly higher levels than they had in their last forecasts in June.

Most Fed officials backed the plan to increase asset purchases in an effort to bring down long-term interest rates and try to boost economic growth. But minutes of both the November 2-3 meeting and a rare, unscheduled video conference held on October 15 showed a wide range of views.

Setting the stage for the bond-buying plan, policymakers debated an array of policy choices at the October meeting, including the possibility of targeting a specific level of bond yields, setting an explicit goal for inflation and having Chairman Ben Bernanke hold periodic news briefings.

The U.S. economy grew 2.5 percent in the third quarter, the Commerce Department reported on Tuesday, faster than a previous estimate of 2.0 percent but still not enough to put a dent in the U.S. unemployment rate of 9.6 percent.

Looking toward the future, Fed officials' estimates for growth in 2011 ranged from 3.0 percent to 3.6 percent, down considerably from June estimates of 3.5 percent to 4.2 percent. Unemployment will remain close to 9.0 percent for much of next year and could still be above 8.0 percent at the end of 2012.

They said the jobless rate would still be hovering around an elevated 7.0 percent in 2013. <FED/FCASTS>

For President Barack Obama, who would face re-election in 2012, the dour prospects are unwelcome news.

The Fed minutes depicted the November policy move in part as an insurance policy against the threat that already low inflation could fall further, potentially morphing into a corrosive bout of deflation. However, the report offered little guidance on what could lead the Fed to either boost or curtail its buying plans.

Stock markets around the world fell on Tuesday on concerns about Ireland's debt troubles and fears Portugal and perhaps Spain could also face difficulty financing their fiscal deficits. The Dow Jones industrial average ended the session down about 140 points or 1.27 percent. .DJI

Investors, instead, fled into the safety of U.S. government bonds, unwinding some of the recent gain in yields that had been seen by some analysts as signaling the Fed's bond-buying move was not working.

DIVIDED WE EASE

Not all Fed officials believed the new policy, which has raised controversy at home and abroad, would help lift the economy out of its doldrums, the minutes showed.

"Just how divided the Fed was came as a surprise," said Mark Vitner, senior economist at Wells Fargo in Charlotte, North Carolina. "Clearly the decision was driven by Bernanke. While the Fed is a deliberative group, it also undermines the effectiveness of the program."

In fact, several participants believed a further increase in Fed credit to the banking system risked future inflation, the minutes said. The Fed's balance sheet has already expanded to around $2.3 trillion following a number of emergency measures undertaken during the 2008 financial crisis.

The Fed's decision to extend its unconventional easing policy, which took it into uncharted waters in economic policy, has been criticized from Republicans and some economists who say it pushes too close to fiscal policy and risks undermining price stability.

Overseas, the central bank's decision sparked concerns about excessive currency appreciation and possibly asset bubbles that could come back to haunt the global economy.

Fed officials seemed divided on this count. Some saw U.S. dollar depreciation, coupled with firmer asset prices derived from the Fed's policies, as broadly beneficial to domestic economic conditions. Others, however, were less sanguine.

"Some participants noted concerns that additional expansion of the Federal Reserve's balance sheet could put unwanted downward pressure on the dollar's value," the minutes said.

One particular passage captured the internal divisions that could make it more difficult for the committee to extend its easing policies if it decides to do so. Its current bond-buying program is set to expire at the end of June.

"A few participants expected that continuing resource slack would lead to some further disinflation in coming years," the minutes said. "However, a few others thought that the exceptionally accommodative stance of monetary policy, coupled with rising prices of energy and other commodities ... made it more likely that inflation would increase."

(Editing by Kenneth Barry)

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Comments (2)
Nuvolari wrote:
Here’s how would Alan Greenspan spin this?

“While we are, in the current environment, unable to confirm disinflation will be fully contained, that is not to say that inflationary concerns have been fully abated.

For millions of Americans actively seeking employment the immediate-term forcast suggests you are ’screwed’.”

Nov 23, 2010 3:25pm EST  --  Report as abuse
jrj90620 wrote:
Deere just announced that future profits could be hit by rising costs.I’m reading this from many companies.Next year should prove interesting as we see if companies are willing to sacrifice profits by not passing on their rapidly rising costs.

Nov 24, 2010 11:52am EST  --  Report as abuse
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