UPDATE 2-Fed minutes: Some ready to ease if recovery lags

Tue Jul 12, 2011 5:43pm EDT

 * Some at Fed ready to ease if jobs picture stays bleak
 * A few felt inflation may force need to tighten
 * Officials agreed on eventual exit strategy sequence
(Refiles to add links)
 By Mark Felsenthal and Pedro Nicolaci da Costa
 WASHINGTON, July 12 (Reuters) - Some Federal Reserve
officials believe further monetary policy easing could be
needed if the recovery remains too sluggish to cut the
stubbornly high U.S. jobless rate and if inflation eases as
expected, minutes of the Fed's last meeting show.
 The minutes of the June meeting, which were released on
Tuesday, offered the strongest suggestion since the Fed's $600
billion bond-buying program ended on June 30 that there could
be consideration of a third round of quantitative easing.
 Although the minutes showed officials were concerned that
continued weak growth could undercut the two-year-old recovery,
not all policy makers were convinced renewed stimulus is
needed. A few held the opposite view, saying that if recent
increases in inflation do not moderate, the Fed should consider
tightening policy sooner than expected.
 All the Fed policy makers viewed the recovery as having
slowed since their April forecasts and said recent
deterioration in labor market conditions was a particular
concern because it could weigh on consumer spending.
 The last Fed policy meeting took place June 21-22, before a
government report showed employers added a scant 18,000 jobs in
June.
 At last month's meeting, the Fed decided to wind down the
second installment of asset purchases that have totaled $2.4
trillion as scheduled. It further signaled it is in no rush to
tighten policy in the face of lofty unemployment over 9 percent
and tepid growth.
 Most analysts expect the Fed's next move to be to raise
interest rates rather than to offer more stimulus by buying
bonds or bolstering its promise to keep rates at rock-bottom
levels. The Fed is not expected to raise rates until the middle
of next year.
 "This just emphasizes to me that it will be quite some time
before they're moving," said Dean Maki of Barclays Capital.
 U.S. stocks rose and the euro gained strength after the Fed
minutes suggested the potential for more monetary policy
support at a later date. The gains were small, however, and
only lasted a short time.
 "People were expecting a flat-out, 'No this is it. This is
the end of the line,' and the fact that the door is still a
little bit open provides a little bit of hope," said Peter
Jankovskis, co-chief investment officer of OakBrook Investments
LLC in Lisle, Illinois.
 Fed Chairman Ben Bernanke is due to face members of
Congress over two days of semi-annual testimony about monetary
policy on Wednesday and Thursday and is likely to provide more
details about the internal Fed debate.
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 BREAKINGVIEWS:
 Fed gives markets more to worry about [ID:nN1E76B1JP]
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 DEBT CEILING WARNING
 In addressing the looming Aug. 2 deadline to raise the U.S.
debt ceiling, the Fed was blunt in warning on the risks, saying
a failure to act by the deadline would result in an inability
of the United States to pay some of its obligations.
 "Even a short delay in the payment of principal or interest
on the Treasury Department's debt obligations would likely
cause severe market disruptions and could also have a lasting
effect on U.S. borrowing costs," the Fed minutes read.
 Officials also noted that investors had become more
concerned about risks. They pointed to an escalation of debt
problems in Greece and other European countries, as well as the
debt ceiling fight playing out between Congress and the White
House.
 The minutes revealed a Fed divided not only over whether to
prepare for more easing or for tightening, but over risks from
inflation. While most officials expected recent increases in
inflation would recede as commodity prices remain stable, some
saw inflation risks to the upside.
 Some also viewed the Fed's own ultra-loose monetary policy
stance -- benchmark rates have been near zero since December
2008 and the central bank has roughly tripled its balance sheet
from pre-crisis levels -- as itself posing risks to inflation
and of creating an inflationary psychology.
 The central bank took the unusual steps of agreeing on two
sets of principles: one on an eventual strategy, the other on
rules governing communications by Fed officials.
 Policy makers agreed that they they would likely begin any
tightening process by stopping reinvestments of maturing bonds
in its portfolio, accompanied by, or shortly followed by, an
end to its promise to hold benchmark rates extremely low for an
extended period.
 Temporary reserve-draining steps would likely accompany
those steps. When conditions warrant, the Fed would raise
benchmark rates.
 As it raised rates, the Fed would also adjust the interest
rate it pays banks on excess reserves as well as the level of
reserves in the banking system.
 Actual sales of assets would likely come some time after
the first increase in benchmark interest rates, the Fed said.
 All but one Fed officials agreed to the exit strategy
principles.
 (Reporting by Mark Felsenthal and Pedro Nicolaci da Costa;
Editing by Leslie Adler)






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