WASHINGTON — Federal Reserve policymakers viewed the US economy’s outlook as particularly clouded, and some wanted to ramp up large-scale asset purchases, according to the minutes of their last meeting published Wednesday.
“Participants saw considerable uncertainty surrounding the outlook for a gradual pickup in economic growth,” the minutes of the September 20-21 meeting of the Federal Open Market Committee said.
The FOMC minutes reflected a wide range of opinions on which actions the Fed could take to help boost the ailing economy, where slow growth has kept unemployment painfully high more than two years after the recession officially ended.
At the end of the two-day meeting, the rate-setting panel unveiled a $400 billion bond-shifting plan and kept interest rates near zero, where they have been since December 2007 in a bid to shore up growth.
Under the bond plan aimed at lowering longer-term interest rates, dubbed “Operation Twist,” the Fed said it would switch bonds in its huge portfolio with a maturity of less than three years to bonds with a maturity of six to 30 years, by the end of June 2012.
But some participants thought more asset-purchasing firepower was needed, after the Fed completed a $600 billion round of quantitative easing (QE) in June, known as QE2.
“A number of participants saw large-scale asset purchases a potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted,” the minutes said.
To aid the depressed housing market, the Fed also said it would reinvest some debt holdings into agency mortgage-backed securities, essentially giving support to Fannie Mae and Freddie Mac, the huge government bailed-out mortgage lenders.
One member who opposed “Operation Twist” also opposed the change in reinvestment policy “because he judged it would not benefit housing markets,” the minutes noted.
The policymakers considered a downwardly revised forecast for growth in the second half of this year and in the medium term.
Since the August 9 FOMC meeting, data showed the job market and indicators of near-term economic activity, such as consumer and business sentiment, were “weaker than anticipated” and financial conditions had soured, the minutes said.
Some participants in the September meeting favored bolder actions to jump-start the economy, while others indicated the Fed has been too accommodative.
“Most members agreed that the revisions to the economic outlook warranted some additional monetary policy accommodation to support a stronger recovery,” the minutes said.
“Two members said that current conditions and the outlook could justify stronger policy action,” but they supported the currently proposed action, “as it did not rule out additional steps at future meetings.”
There were three votes against the action among the 10 votes cast for the FOMC’s post-meeting statement: Richard Fisher, Narayana Kocherlakota and Charles Plosser.
The three members dissented “because they did not support additional policy accommodation at this time,” the minutes said.
For Fisher, “Operation Twist” would provide “few, if any, benefits in support of job creation or economic growth,” while it could hamper the Fed’s timely exit from emergency policy support.
Kocherlakota objected that the central bank’s level of accommodation was no longer “appropriate” for current economic conditions, with the economy growing, albeit slowly.
And Plosser, who agreed with Fisher on the questionable positive impact of “Operation Twist” and how it may impede the Fed’s exit strategy, also highlighted the risk that the stimulus will spur inflation.
“In his view, with inflation continuing to run above earlier forecasts, such a program could risk adding unwanted inflationary pressures and complicate the eventual exit from the period of extraordinarily accommodative monetary policy,” the minutes said.
The next FOMC meeting is scheduled on November 1-2.
Photo credit: Dan Smith