Grim Fed pondered even bolder easing in August
WASHINGTON (Reuters) - The central bank in early August discussed a range of unusual tools it could use to help the economy, with some officials pressing for bold new steps to shore up a flagging recovery.
Before settling on a promise to keep rates near zero until at least mid-2013, the Fed examined an array of options at its disposal, including tying the path of interest rates to either unemployment or inflation.
"Participants noted a deterioration in labor market conditions, slower household spending, a drop in consumer and business confidence and continued weakness in the housing sector," according to minutes from the central bank's August 9 meeting released on Tuesday.
The minutes said a "few" officials pressed for going beyond the low-rates vow the Fed offered, but that they accepted the new policy guidance "as a step in the direction of additional accommodation."
Prices of government bonds and oil futures rose after the minutes were released, the dollar briefly pared earlier gains against the euro and stock prices clung to small gains.
"The risks to the economic outlook are not trivial, and they are primarily skewed to the downside. That means that QE3 is not off the table," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York, referring to the possibility of a third round of Fed bond buying, or quantitative easing.
The U.S. economy sputtered in the first six months of 2011, with gross domestic product expanding at less than a 1 percent annual pace, raising recession fears. The jobless rate, meanwhile, has held above 9 percent.
Fed staff marked down their growth forecast for the rest of 2011 and next year. While they continued to expect some rebound in activity in the near-term, they viewed the pick-up in growth as insufficient to cut unemployment significantly.
Inflation forecasts for the second half of this year were raised slightly, but given the labor market slack, prices were seen rising at a subdued pace in 2012.
"That the staff forecast has slack in the labor market being removed slowly suggests that its central forecast for growth is only modestly above potential," said Michael Gapen, an economist at Barclays Capital in New York.
The latest dark sign for the economy came on Tuesday when data showed confidence among U.S. consumers plunged in August to its lowest level in more than two years.
At its meeting, the Fed discussed the possibility of engaging in further asset purchases, shifting the composition of bonds on its portfolio toward longer-dated maturities and lowering the interest it pays on bank reserves to encourage lending.
While some officials felt there was little the central bank could do to strengthen the economy, the prospect of a protracted snail-paced recovery led the central bank to provide firmer guidance on the outlook for monetary policy in the hope of pulling long-term interest rates lower.
"In choosing to phrase the outlook for policy in terms of a time horizon, members also considered conditioning the outlook for the level of the federal funds rate on explicit numerical values for the unemployment rate or the inflation rate," the minutes said.
FORK ON POLICY ROAD
Comments from two top Fed officials on Tuesday highlighted the divided nature of the central bank's policy committee as it prepared for its next meeting on September 20-21.
Charles Evans, president of the Chicago Federal Reserve Bank, said in an interview with CNBC that he favored strong central bank accommodation "for a substantial period of time," since the economy now looks to be moving "sideways."
But Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank, stopped well short of signaling support for further easing in a speech in Bismarck, North Dakota.
The central bank cut short-term interest rates to near zero in December 2008 and bought $2.3 trillion in mortgage-related and government debt in an effort to spur recovery.
Its decision to announce that it expected to hold interest rates near zero into 2013 sparked three dissents, the most in nearly 20 years, including one from Kocherlakota.
The minutes, however, showed there were also supporters for a more aggressive easing of monetary policy.
"The hawks on the FOMC may generate a fair amount of media attention, but today's minutes ... remind us that there is a less vocal dovish faction that favors even more aggressive policy easing, and their view has been winning out over time," said JPMorgan economist Michael Feroli.