Federal Reserve policymakers last month were prepared to ease monetary policy “before long” and focused on purchases of Treasury securities and boosting inflation expectations as ways to add stimulus.
Policymakers “wanted to consider further the most effective framework for calibrating and communicating any additional steps to provide such stimulus,” the Fed said in minutes of the Sept. 21 session, released today in Washington. The Fed also said for the first time that it was considering targeting a path for the level of nominal gross domestic product as a way to increase price expectations.
The report provides more clarity on the timing and components of potential easing actions without giving the amount of any additional asset purchases by the Fed. Since the meeting, weaker-than-forecast job growth in September and comments by policymakers, including New York Fed President William Dudley, have fueled speculation that the central bank will soon start a second wave of unconventional easing.
“Many participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate or if inflation continued to come in below levels consistent with the FOMC’s dual mandate, it would be appropriate to provide additional monetary policy accommodation,” the Fed’s Open Market Committee said in the minutes.
Stocks Pare Declines
Stocks erased losses after the release of the minutes. The Standard & Poor’s 500 Index rose 0.2 percent to 1,167.80 at 2:16 p.m. in New York after falling as much as 0.8 percent.
The Sept. 21 statement saying the Fed “is prepared to provide additional accommodation if needed” was meant to accord “with the members’ sense that such accommodation may be appropriate before long,” the minutes said.
“Meeting participants discussed several possible approaches to providing additional accommodation but focused primarily on further purchases of longer-term Treasury securities and on possible steps to affect inflation expectations,” the report said.
The minutes caution that some officials said the economic benefits of further asset purchases “could be small in current circumstances.” Also, some policymakers “thought that additional accommodation would be warranted only if the outlook worsened and the odds of deflation increased materially,” the report said.
The Fed’s Sept. 21 statement was the first in almost two years of near-zero interest rates to say too-low inflation would warrant looser monetary policy. By raising inflation expectations, real short-term interest rates would be lower, stimulating the economy, the minutes said.
Fed staff economists lowered their U.S. growth forecast for the third straight meeting. The economy will grow at a slower pace than previously projected in the second half of 2010 and next year, the minutes said.
Fed governors and regional presidents last presented economic projections in June and will revise their forecasts at the Nov. 2-3 meeting. Fed Chairman Ben S. Bernanke is scheduled to speak in Boston Oct. 15 on monetary policy tools.
Central bankers “generally agreed that the incoming data indicated that output and employment were increasing only slowly and at rates well below those recorder earlier in the year,” the minutes said. Policymakers saw data on business and household spending as “mixed” and said that residential construction and home sales were “very weak.”
“Nevertheless, participants judged the economic recovery to be continuing and generally expected growth to pick up gradually next year,” the minutes said.
While the National Bureau of Economic Research said last month that the worst U.S. recession since the Great Depression ended in June 2009, economic growth slowed to an annualized 1.7 percent rate in the second quarter from 3.7 percent in the first period.
The economy probably expanded at a 1.9 percent pace in the quarter ended Sept. 30, according to the median estimate of economists surveyed by Bloomberg News last month.
“A number of participants noted that the current sluggish pace of employment growth was insufficient to reduce unemployment at a satisfactory pace,” the minutes said. The unemployment rate held at 9.6 percent in September while payrolls fell by 95,000 workers after a revised 57,000 decrease in August, government figures showed Oct. 8. Private employers added 64,000 jobs in September, less than forecast.
The number of workers employed by local governments fell to the lowest level since October 2006 as U.S. cities and towns reduced the ranks of teachers and other employees in a bid to cut costs. Bristol-Myers Squibb Co., the New York-based drugmaker, said in September it will cut 3 percent of its global workforce, about 840 jobs, during the next six months.
The Fed minutes said most officials saw underlying inflation as below levels consistent with central bank objectives. The Sept. 21 FOMC statement said “measures of underlying inflation are currently at levels somewhat below those the committee judges most consistent, over the longer run,” with its legislative mandate for maximum employment and stable prices.
At the same time, “participants saw only small odds of deflation,” the report said.
Prices excluding food and energy have gained at a 1 percent annual pace in the three months through August, below Fed officials’ long-term preferred range of about 1.7 percent to 2 percent.
At the same time, Wal-Mart Stores Inc.’s prices rose in September to the highest level in at least 21 months, according to JPMorgan Chase & Co., as the world’s largest retailer scaled back discounts from earlier this year.
Dudley, who serves as FOMC vice chairman and is the only regional Fed president to vote at every meeting, said in an Oct. 1 speech that “further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long.”
Other officials who indicated since the meeting that they favor further easing include Boston Fed President Eric Rosengren, who said Sept. 29 the Fed should respond “vigorously, creatively, thoughtfully and persistently” to a slow recovery, and Chicago Fed President Charles Evans, who said more action may be “desirable.”
Opponents of further easing include Philadelphia Fed President Charles Plosser, who said Sept. 29 that he doesn’t see how additional asset purchases will help employment in the near term. Richard Fisher of the Dallas Fed said Oct. 7 that the “efficacy of further accommodation at this point has yet to be established.”
Kansas City Fed President Thomas Hoenig was the only voting FOMC member to go against the decision for the sixth time this year, tying a record for most consecutive dissents at regular meetings since 1955.
In a speech earlier today, Hoenig, the Fed’s longest- serving current policy maker, cast doubt on the effectiveness of a new round of asset purchases, saying the costs are likely to outweigh the benefits.
Christina Romer, who resigned last month as chairman of President Barack Obama’s Council of Economic Advisers, yesterday urged further “unconventional policy” such as additional asset purchases, lowering the interest rate on reserves or aggressive communication.
That “could absolutely be helpful and absolutely should be tried,” Romer said yesterday at a forum on central banking at the National Press Club in Washington.
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