April 3 (Bloomberg) -- The Federal Reserve is holding off on increasing monetary accommodation unless the U.S. economic expansion falters or prices rise at a rate slower than its 2% target.
“A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below” 2%, according to minutes of their March 13 meeting released today in Washington.
The central bank last month affirmed its plan, first announced in January, to hold interest rates near zero through late 2014 as the economy may fail to grow fast enough to continue bringing down the unemployment rate. Fed Chairman Ben S. Bernanke has defended the pledge as appropriate since the meeting, saying that despite some improvement in the economy it’s “far too early to declare victory.”
The minutes of the meeting show decreased urgency to add monetary stimulus. At their January meeting, a few members said that current economic conditions “could warrant the initiation of additional securities purchases before long.” In last month’s meeting, no sentiment was expressed for additional easing without a deterioration in conditions.
The FOMC said in March that unemployment is still “elevated” even after recent improvements in the job market. Richmond Fed President Jeffrey Lacker dissented because he doesn’t anticipate that economic conditions will warrant exceptionally low rates for so long.
Policy Makers
Fed policy makers also discussed the conditions under which they’d alter their plan to hold rates near zero through at least late 2014. That pledge is conditional on economic conditions “and members concurred that the date given in the statement would be subject to revision in response to significant changes in the economic outlook.”
“A number” of policy makers did not see that threshold being met and said that “while recent employment data had been encouraging” there was a “nonnegligible risk that improvements in employment could diminish as the year progressed.”
Bernanke highlighted those risks in a March 27 television interview with ABC News.
“We need to be cautious and make sure this is sustainable,” he said in the interview. “We haven’t quite yet got to the point where we can be completely confident that we’re on a track to full recovery.”
Asked if another round of quantitative easing, or large- scale bond purchases, remains “on the table,” the 58-year-old Fed chief said, “we don’t take any options off the table.”
“We have to be prepared to respond to however the economy evolves,” he said.
Those remarks expanded on a speech by Bernanke on March 26 in Arlington, Virginia, in which he said the fall in the jobless rate may reflect “a reversal of the unusually large layoffs that occurred during late 2008 and over 2009.” Significant improvement in reducing unemployment will probably require faster growth, he said.
In their March discussion policy makers did not see the economy growing so strongly that they would have to raise their forecasts in coming years.
“Most participants did not interpret the recent economic and financial information as pointing to a material revision to the outlook for 2013 and 2014,” the minutes said.
FOMC participants also discussed additional steps they could take to better explain to the public how changes in the economic outlook affect monetary policy decisions, such as what qualitative or quantitative data would prompt which actions, according to the minutes.
Could be Helpful
“Several participants suggested that it could be helpful to discuss at a future meeting some alternative economic scenarios and the monetary policy responses that might be seen as appropriate under each one,” according to the minutes.
Bernanke has identified housing as a “big concern” for the Fed and said on March 27 “we’re not really yet in a full- fledged housing recovery.”
Housing starts in the U.S. hovered in February near a three-year high and building permits rose, adding to signs that the industry at the heart of the last financial crisis is stabilizing. Existing home sales in January and February marked the strongest start to a year since 2007.
After the FOMC meeting the yield on the 10-year Treasury rose, hitting 2.38% on March 19, the highest since October, compared with 2.03% on March 12, the day before the gathering. The yield fell to 2.18% as of yesterday.
Stocks Rally
Stocks have climbed since the meeting, with the Standard & Poor’s 500 index reaching an almost four-year high of 1,419.04 yesterday. The index on March 30 completed its biggest first- quarter rally since 1998.
“I’m relatively comfortable that absent a breakdown in the plumbing in Europe or the U.S. that things are poised for continued growth in the second half of 2012,” John Brynjolfsson, who oversees $800 million as chief investment officer at the Irvine, California-based hedge fund Armored Wolf LLC said before the minutes were released. “We have storm clouds on the horizon in that we know deleveraging and losses in the banking system exist, but with liquidity abundant, none of those things are front and center.”
The best six months of job growth since 2006, unemployment at a three-year low, and stock-market gains are giving Americans the means to withstand a higher gasoline price. A March 30 report from the Commerce Department said Americans increased their spending by the most in seven months, with purchases climbing 0.8% in February.
“Consumers are becoming a little bit more resilient to fuel prices,” Don Johnson, U.S. sales chief for General Motors Co., said yesterday on Bloomberg Television’s “In The Loop With Betty Liu.” More consumers will be spurred to replace old cars, he said, “as the economy continues to strengthen, which it has been recently, more and more of that pent-up demand will be released into the market.”
