Fed Mulls Stimulus if Outlook Worsens Appreciably
(Reuters) – The outlook for the U.S. economy would have to deteriorate “appreciably” to spur fresh support from the Federal Reserve, according to minutes of the central bank’s last policy meeting released on Tuesday.
The August 10 meeting was held against a darkening economic backdrop, and the Fed, in a significant policy shift, decided to reinvest maturing mortgage-related securities in government debt so its support for the stumbling recovery did not fade.
The minutes showed this shift would be a precursor to a return to outright asset purchases only if downbeat signs on the economy continued to mount.
Several policy makers believed they “would need to consider steps … to provide additional policy stimulus if the outlook were to weaken appreciably further,” the minutes said.
The minutes reflected an unusually wide range of views at the Fed for the outlook for the recovery and for inflation, and how the central bank should manage monetary policy.
Fed staff told policy makers that mortgage prepayments would likely shave $340 billion off mortgage-backed securities, or MBS, held in the Fed’s $2 trillion portfolio by the end of 2011 absent action. An additional $55 billion in agency securities were expected to mature over the same time frame.
While the minutes showed the current preference was to buy Treasury debt with the proceeds, officials left the door open to other options.
“While reinvesting in Treasury securities was seen as preferable given current market conditions, reinvesting in MBS might become desirable if conditions were to change,” the minutes said.
Even so, some officials worried the move might be send an “inappropriate” signal that the Fed was on the cusp of launching another massive securities shopping expedition.
The Fed stopped buying MBS and mortgage-agency debt at the end of March after it had accumulated about $1.4 trillion worth. It also bought $300 billion in longer-term Treasury securities as part of a program to spur recovery.
“The minutes … characterize the decision as more of a tactical decision to keep the balance sheet at its current level as opposed to a decision to provide additional stimulus,” Barclays Capital economist Michael Gapen said in a note to clients. “The hurdle for additional stimulus measures is higher than the August … statement seemed to imply,” he said, referring to the central bank’s initial policy announcement.
The Fed began buying mortgage-linked debt and longer-term U.S. Treasury securities as a way to drive down a range of interest rates and lift the economy after it had chopped overnight borrowing costs to near zero in December 2008.
U.S. Treasury debt prices on Tuesday held gains as the minutes underscored investors’ concerns the recovery is faltering. The comments weighed on stocks, which closed up marginally, with some analysts saying the minutes suggested the bar for further Fed easing was high.
DIVERGENCE OF VIEWS
The minutes were laced with expressions of concern that the U.S. recovery might be losing momentum even as overseas economies were proving more resilient than expected.
“Most (officials) saw the incoming data as indicating that the economy was operating farther below its potential than they had thought, that the pace of recovery had slowed in recent months, and that growth would be more modest during the second half of 2010 than they had anticipated,” the minutes said.
However, some of the 17 officials on the policy-setting panel said recent data, while weak, was consistent with their forecasts. Others said it was too soon to conclude the outlook for growth had clearly softened.
Officials were similarly divided on the inflation outlook.
Many said underlying inflation would be below preferred levels for some time, and a number judged that the risk of further disinflation had increased, although the minutes said the risk of a potentially crippling deflation were small.
A few said keeping interests rates at an exceptionally low level might be creating conditions for a future price surge.
The vote at the end of meeting was 9-1, with Kansas City Federal Reserve Bank President Thomas Hoenig dissenting.
Fed Chairman Ben Bernanke said on Friday that additional securities purchases were among the tools the Fed could deploy to stimulate the economy if it stumbled badly, and that those purchases could be effective.
While Bernanke said officials opted to reinvest in Treasuries in part because they prefer a portfolio made up mostly of government securities, the Fed would consider other options if conditions warranted.