WASHINGTON U.S. Federal Reserve officials thought in September the struggling recovery might soon need more help and they discussed several ways to provide it, including possible adoption of a price-level target.
The Fed officials who gathered on September 21 focused both on the possibility of buying more longer-term U.S. government debt to drive borrowing costs lower and ways to nudge the public into expecting higher levels of inflation in the future to spur spending, the central bank said on Tuesday.
Policy-makers had a "sense that (more) accommodation may be appropriate before long," minutes of the meeting said.
The U.S. central bank's policy committee released its members' views as international debate intensified over how the Fed's easy monetary policy was driving down the dollar and in turn boosting the currencies of many emerging economies.
To help shift inflation expectations, policy-makers debated providing more detail on what rates of inflation they would prefer and discussed showing a willingness to tolerate even higher inflation temporarily, a policy approach known as price-level targeting.
They also considered the possibility of targeting a path for GDP growth.
The news helped U.S. stocks trim losses, with major indexes ending the day just in positive territory. The dollar was up against the euro for much of the day but lost ground after the minutes were released.
The Fed has kept overnight rates near zero since December 2008 and has bought about $1.7 trillion in bonds to lower other borrowing costs to help the economy recover from the worst recession since the 1930s.
The minutes bolstered expectations the Fed will move to drive down rates further by restarting purchases of Treasury debt as soon as its next meeting on November 2-3. However, they provided no details about the scope of potential purchases.
"The Fed will buy Treasury securities, but in what amount, for how long or until what economic goal is met is unclear," said Paul Ashworth, an economist for Capital Economics in Toronto.
TAILORING THE MESSAGE
The minutes showed the Fed grappling for fresh ways to spur the economy. If the central bank were able to foster higher expectations of future inflation, businesses and consumers may not want to postpone purchases, thereby providing an immediate boost to the economy.
After their September 21 meeting, policymakers said they stood ready to provide more support if needed to keep the recovery on track and raise inflation from undesirably low levels.
Over the past 12 months, the core Consumer Price Index has risen just 0.9 percent. Fed officials would like to see that north of 1.5 percent.
"Many members considered the recent and anticipated progress toward meeting the committee's mandate of maximum employment and price stability to be unsatisfactory," the minutes said.
The minutes, however, showed not everyone was on board. In a speech in Denver on Tuesday, Kansas City Federal Reserve Bank President Thomas Hoenig, a steadfast opponent of the central bank's super-easy monetary policy, said more easing would do little to aid recovery and could spark an unwanted bout of inflation.
"At this point, with a modest recovery under way and inflation low and stable, I believe the economy would be better served by beginning to normalize monetary policy." he told the National Association of Business Economics in Denver
Expectations the Fed will soon launch a new round of asset purchases have led investors to move their cash into emerging markets in search of a higher return, pushing up the values of currencies in nations from Latin America to Asia, prompting concerns in those countries about a loss of export competitiveness and the risk of asset bubbles.
Brazilian Finance Minister Guido Mantega renewed his warning that easy monetary policies in advanced nations could spark a currency war as developing countries seek to protect their economies.
"The Federal Reserve is promising quantitative easing, which is monetary policy's last resort," Mantega told the Council of the Americas in New York. "I don't think it will reactivate the economy, but it will weaken the dollar."
Hoenig said the Fed should be mindful of such spillover effects.
"We are not an island," he said. "We affect other countries, they know that and they react to us, and therefore we are affected by our actions as it comes back to us."
(Additional reporting by Ann Saphir in Denver and Walter Brandimarte in New York, Editing by Chizu Nomiyama and Andrew Hay)