February 15, 2012 / 7:36 PM / 6 years ago

Some at Fed saw more bond buying before long

WASHINGTON (Reuters) - A few Federal Reserve officials in January believed another round of bond buying by the central bank would be needed before long to support the U.S. economy while others withheld judgment to await more data.

The few officials who believed more asset purchases could be warranted soon pointed to the prospect for continued high unemployment and a lack of inflation pressure, minutes of the Fed’s January 24-25 policy meeting released on Wednesday showed.

Others thought more bond buying would be necessary only if the recovery lost momentum or if inflation dipped, the minutes said.

“The decision to provide additional accommodation to the economic recovery remains a distinct possibility,” said Millan Mulraine of TD Securities. The minutes underscored that the Fed’s threshold for taking further action remains relatively low, he added.

All but one of the Fed officials felt that when the time comes for the central bank to reverse its ultra-loose monetary policy, bond sales should follow interest rate hikes.

St. Louis Fed President James Bullard has said he thinks the U.S. central bank should start shrinking its expanded balance sheet before it starts raising rates.

The Fed cut rates to near zero in December 2008 and has bought $2.3 trillion in Treasuries and mortgage-related debt to boost the economy after a deep recession in 2007-09.

At the close of its January meeting, the Fed said it would likely keep interest rates at rock-bottom levels until at least late 2014. Fed Chairman Ben Bernanke expressed caution about recent improvements in the economy and left the door open to further Fed bond buying to boost growth.

The Fed also issued its first ever “longer-run goals and policy strategy” statement after that meeting saying it targets inflation of 2 percent.

All of the members of the Fed’s policy-setting Federal Open Market Committee supported the statement except Governor Daniel Tarullo, who abstained on the grounds that because he questioned whether it promoted better communication, the minutes showed.

Since then, data has continued to point to surprisingly robust economic growth. Employers added 243,000 jobs in January and the unemployment rate dipped to 8.3 percent.

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Graphic: Fed economic, rate forecasts:

link.reuters.com/zud36s

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Fed officials have expressed a wide spectrum of views since their last meeting about the appropriate course of policy. Some have called for further accommodation to stimulate stronger growth while others have pointed to signs of growing momentum and warned the central bank should not wait too long to tighten.

Dallas Fed President Richard Fisher, one of the most outspoken anti-inflation hawks among top Fed officials, on Wednesday predicted that there would be no third round of bond buying.

“I think it’s a fantasy of Wall Street - it’s not going to happen, it’s not necessary,” he told reporters after a speech.

A recent poll of economists put the odds of another round of asset purchases at 35 percent.

There was little market reaction to the minutes. The euro extending losses against the dollar due to the downside risks of GDP forecasts.

The Fed minutes also showed U.S. policymakers debating whether it was necessary to specify how long they thought interest rates should stay very low.

While some thought showing forecasts of individual policymakers for the timing of the first tightening and the pace of raising rates was sufficient, others thought it was important for the Fed’s policy-setting panel to provide a formal decision on how long rates should stay very low.

Despite an improving economic outlook at the time of the Fed meeting, policymakers were somewhat gloomy about the prospects for a speedy recovery. They saw economic turmoil and slowing growth in Europe and the weak U.S. housing market, among other factors, as restrainting the pace of domestic economic growth.

Upon closer inspection, the minutes offered a few nuggets of insight into policymakers’ projections for the path of interest rates.

For example, the Fed noted that 11 of the its 17 top officials anticipated that the fed funds rate at the end of 2014 would be 1 percent or lower.

Since the Fed said in January that conditions warrant “exceptionally low” rates through late 2014, that suggests that at “exceptionally low” could refer to rates as high as 1 percent, and not necessarily to the zero to 0.25 percent range rates are currently in.

The minutes further suggest that policymakers who believe rates should rise as soon as this year or next see borrowing costs climbing very gradually, while those who don’t see the first increase until 2016 see them climbing as high as 1.75 percent by the end of that year.

“The detailed breakdown of the expected policy rates ... revealed a slow start to the tightening cycle - roughly one hike per quarter, every other meeting, consistent with our expectations of a slow takeoff for tighter policy,” said Bank of America Merrill Lynch economist Michael Hanson.

Additional reporting by Burton Frierson; editing by James Dalgleish, editing by Gary Crosse

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