Minutes: Fed Ready to Ease 'Fairly Soon' Unless Economy Improves
The Federal Reserve is likely to deliver another round of monetary stimulus
"fairly soon" unless the economy improves considerably, minutes from the U.S.
central bank's latest meeting suggested.
While the July 31-August 1 meeting occurred before some encouraging economic
data, including a stronger-than-expected rise in July payrolls, policymakers
were pretty categorical about their dissatisfaction with the outlook, according
to the minutes released on Wednesday.
"Many members judged that additional monetary accommodation would likely be
warranted fairly soon unless incoming information pointed to a substantial and
sustainable strengthening in the pace of the economic recovery," the Fed said.
Wall Street stocks erased most losses after the Fed released the minutes.
Treasury bond prices, which have been under pressure from stronger economic
figures, extended gains. The dollar fell and the euro surged to a seven-week
high against the greenback at the prospect of the Fed providing more stimulus.
The Dow Jones Industrial Average closed down 30.82 points at 13,172.76, although
well above its session low, but the broader S&P 500 Index clawed back from
losses to end 0.32 point higher at 1,413.49.
"Certainly these minutes are dovish and will revive hopes for increased Fed
easing," said David Sloan, economist at 4Cast Ltd. "We have seen some
improvement in the data recently, but whether it is enough to qualify as a
significant upturn is unclear."
The Fed cut overnight interest rates to near zero in December 2008 and has
bought $2.3 trillion in U.S. government debt and mortgage-related bonds in a
further effort to push borrowing costs lower. It has said it does not expect to
raise rates until late-2014 at the earliest.
Some officials at the meeting raised concerns about the Fed's large presence in
the markets for Treasury and mortgage-backed securities, but others agreed with
a staff analysis showing "substantial capacity" for buying new assets.
The Fed held policy steady at the gathering but signaled a renewed readiness to
act amid lingering softness in the economy in a statement it issued following
the meeting.
The minutes showed the central bank is actively considering a "flexible"
bond-buying program, which suggests it may not announce an upfront amount to
purchase, as it did in the past.
"A move to an open-ended policy stance would be a important and powerful shift
in the implementation of Fed policy; it would, in effect, say that the Fed is in
motion until the data tell it to stop," Michael Gapen, at Barclays Bank in New
York, wrote in a research note to clients.
Fed officials saw significant risks to an already weak U.S. economy, which grew
at a sluggish 1.5 percent annual rate in the second quarter. The risks include a
worsening of Europe's financial strains and looming U.S. budget cuts and tax
hikes, which have become commonly known as the fiscal cliff.
U.S. economic data since the meeting has been a bit less gloomy. Although
employment growth slowed sharply in the second quarter, it picked up again in
July, when the economy created 163,000 jobs. But the unemployment rate, which is
derived from a separate Labor Department survey, rose to 8.3 percent from 8.2
percent in June.
At the last meeting, many Fed officials supported pushing back the likely timing
of the eventual first rate hike, but they decided to defer the decision to the
Fed's next meeting on September 12-13, when the central bank will release a new
round of economic forecasts.
A few central bankers thought it might be a good idea to replace such language
with guidance directly linked to economic factors, as has been proposed by
Chicago Federal Reserve Bank President Charles Evans.
Officials also debated and tested the possibility of developing a consensus Fed
forecast for the economy, and an associated path for monetary policy under a
long-standing effort to improve communication on their thinking. They decided to
hold a second test in conjunction with September's meeting.
A couple of policymakers favored lowering the rate the Fed pays banks to park
their excess reserves at the central bank, currently at 0.25 percent. But
several worried that money market funds could run into trouble if their returns
are crimped further.
Officials noted the European Central Bank's recent decision to lower its deposit
rate to zero offered a chance to learn about possible effects.
Similarly, a couple of officials broached the possibility of developing a loan
incentive program like the Bank of England's recently minted funding-for-lending
program.
The 80 billion pound ($127 billion) project, launched in June by the British
central bank and the government, is designed to spur lending by tying banks'
access to cheap credit directly to bank lending to households and businesses.
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