A few members of the Federal Open Market Committee said the Fed should ease policy to move the economy toward its targets for full employment and stable prices, according to minutes of the June 19-20 meeting released yesterday in Washington. Several others said more action could be warranted if growth slows, risks intensified or inflation seemed likely to fall “persistently” below their goal.
“You have a majority to do a lot more with even a small downward revision in the forecast,” said Joe Gagnon, who worked as an associate director at the Fed Board’s Division of International Finance from 1999-2008. Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington, said the Fed’s next move could come as early as the Sept. 12-13 meeting.
As Chairman Ben S. Bernanke and fellow policy makers extended their Operation Twist program through the end of the year, they debated whether additional steps such as a third round of asset purchases, known as quantitative easing, might be needed. Some said there was a risk that buying more Treasuries might eventually disrupt the government debt market.
The FOMC met before the Labor Department reported last week that employers added 80,000 jobs to payrolls in June, fewer than economists forecast, while the jobless rate was unchanged at 8.2 percent, the 41st consecutive month above 8 percent. Other reports showed manufacturing shrank in June for the first time since the recovery began and consumer spending stalled in May.
‘Poor Results’
“It’s more than just the dovish branch of the voting membership that appears to be signing on to the idea of QE3 if the economy loses momentum,” said Dana Saporta, U.S. economist for Credit Suisse in New York. “We do know that since that meeting, we’ve gotten some poor results, most noticeably the June employment report.”
The Standard & Poor’s 500 Index (SPX) fell less than 0.1 percent to 1,341.45 at the close of trading in New York after declining as much as 0.6 percent. The yield on the 10-year Treasury note rose to 1.52 percent from 1.5 percent the day before.
The minutes showed 15 FOMC participants said the risks to the economy were weighted to the downside in June, up from eight in April. Thirteen said the risks to the unemployment rate were weighted to the upside, up from nine in April.
Voting Seats
The Fed’s 19 presidents and governors take part in each FOMC meeting, while only 12 have votes at any given time. The seven governors and New York Fed president have permanent votes, while the other Fed presidents rotate among four voting seats.
Several Fed policy makers said the central bank should “explore the possibility of developing new tools to promote more accommodative financial conditions and thereby support a stronger economic recovery,” without specifying what those tools might be.
“They’ve intensified their concerns about the downside risk, and they’re talking about additional tools,” said Michael Hanson, senior U.S. economist at Bank of America in New York.
The FOMC decided to extend Operation Twist by swapping $267 billion of shorter-term securities with the same amount of longer-term debt. The program is intended to reduce long-term interest rates. The Fed also repeated that its key interest rate was likely to stay near zero at least through late 2014.
Fed Chairman Ben S. Bernanke, at a press conference after the meeting, said policy makers were prepared to “take additional steps” to boost the economy.
‘Modest’ Effect
Several central bankers said that extending Operation Twist was likely to have a “modest” effect on already low interest rates. Richmond Fed President Jeffrey Lacker dissented from the decision, arguing that the move would do little to help growth or employment.
While some policy makers expressed concern excessive purchase of Treasuries could “at some point, lead to deterioration” in the government debt market, members agreed the risk was “low at present” and would be outweighed by the benefits of extending Operation Twist.
“They’re not entirely confident that the options they have are good ones,” said Drew Matus, U.S. economist at UBS AG in Stamford, Connecticut. “They’re being more open about their limitations.”
Opens Door
Lou Crandall, chief economist at Wrightson ICAP LLC, said the committee’s discussion of potential costs to the functioning of the more than $10.5 trillion Treasury market opens the door to renewed purchases of mortgage-backed securities.
“If you want to spread the impact, then you add another market,” Crandall said.
The Fed lowered interest rates to zero in December of 2008 and initiated two rounds of large-scale asset purchases totaling $2.3 trillion. In the first round the central bank purchased Treasuries and housing debt, while it limited purchases to Treasuries in the second round.
San Francisco Fed President John Williams and the Chicago Fed’s Charles Evans this week said that the central bank could add additional stimulus through a third round of asset purchases, this time including housing debt guaranteed by mortgage-finance companies Fannie Mae, Freddie Mac and Ginnie Mae.
“If further action is called for, the most effective tool would be additional purchases of longer-maturity securities, including agency mortgage-backed securities,” Williams said in a July 9 speech in Coeur D’Alene, Idaho. Evans said he would have favored the Fed taking stronger action in June.
Less Supportive
Participants at the meeting said financial conditions had become less supportive of the economy as investors’ concerns about the euro region’s sovereign-debt and banking crisis increased. Policy makers said that strains in Europe could spill over into the U.S. and saw the need of “undertaking adequate preparations to address such spillovers if they were to occur.”
Nearly all policy makers judged uncertainty about economic growth and unemployment to be higher than the normal level during the previous 20 years, the minutes show.
Inflation is also falling below the Fed’s 2 percent goal. Prices rose 1.5 percent from a year earlier in May, as measured by the personal consumption expenditures price index. The inflation gauge is the lowest since January 2011 and has dropped from a 2011 peak of 2.9 percent in September.
“There’s a growing coalition of members who are inclined to do more and who really feel that they’re failing to meet their objectives,” said Jeffrey Greenberg, a U.S. economist at Nomura Securities International LLC in New York. “They see the unemployment rate and read that as a clear indication that they’re not achieving the full employment aspect of the dual mandate.”
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