Federal Reserve policy makers said they could change the size of the central bank’s monthly asset purchases to reduce the risks associated with the program, such as disrupting financial markets and spurring inflation.
“Most participants thought these risks could be managed since the committee could make adjustments to its purchases, as needed, in response to economic developments or to changes in its assessment of their efficacy and costs,” according to the record of the Federal Open Market Committee’s Sept. 12-13 gathering released today in Washington.
Fed Chairman Ben S. Bernanke and his policy making colleagues announced the central bank will buy $40 billion a month of mortgage bonds in a third round of quantitative easing. The FOMC aims through its newest phase of record stimulus to spur economic growth and bring down an unemployment rate stuck above 8 percent for 43 months.
The minutes contain a detailed discussion of the costs and benefits of that policy, with a few FOMC participants expressing “skepticism” that the program could help, and several saying that the purchases could “complicate the committee’s efforts to withdraw monetary policy accommodation when it eventually became appropriate to do so.”
Policy makers discussed whether to purchase mortgage-backed securities or Treasury debt with some saying that “all else being equal, MBS purchases could be preferable because they would more directly support the housing sector, which remains weak but has shown some signs of improvement.”
Stocks Rise
The Standard & Poor’s 500 Index maintained gains after the release of the minutes, rising 0.6 percent to 1,460.06 at 2:18 p.m. New York time. The dollar and Treasuries remained lower.
The FOMC in the September statement also extended its guidance for how long its target interest rate will remain near zero. The Fed lowered the rate to a range of zero to 0.25 percent in December and said it’s likely to remain there “at least through mid-2015.”
The Fed didn’t set a total amount or duration for its mortgage-bond purchases while saying in their statement that “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”
Bernanke said in an Oct. 1 speech in Indianapolis that forecasting the main interest rate will remain near zero “doesn’t mean that we expect the economy to be weak through” mid-2015.
The minutes reiterated that theme, saying that central bankers wanted to clarify that holding interest rates low “did not reflect an expectation that the economy would remain weak, but rather reflected the committee’s intention to support a stronger economic recovery.”
Many participants said that “specifying numerical thresholds” for unemployment and inflation would be a better way to give forward guidance about how long they will keep the main interest rate near zero, according to the minutes. Some officials said giving thresholds may be “too simple to fully capture the complexities of the economy and the policy process or could be incorrectly interpreted as triggers prompting an automatic policy response,” the minutes show.
Most agreed that numerical thresholds could give “more clarity about the conditionality” of guidance, and more work is needed to address the “communications challenges,” according to the minutes.
‘Consensus Forecast’
The minutes noted that policy makers had conducted an experiment on building a “consensus forecast” and participants agreed to discuss the results at their next meeting on Oct. 23- 24.
All of the Fed’s 12 regional presidents and seven Washington-based governors are participants in meetings of the FOMC. The minutes do not identify participants by name.
The FOMC members are the 12 participants who vote on policy. The governors, the New York Fed President and a rotating group of four of the regional presidents serve as voting members of the committee. This year, the Cleveland, Richmond, Atlanta and San Francisco Fed Presidents hold a vote.
The FOMC members voted 11-1 in favor of their action at the September meeting with only Richmond Fed President Jeffrey Lacker dissenting. Lacker has dissented from every FOMC statement this year.
Equities Rally
The S&P 500 has climbed more than 15 percent this year and remains near a four-year closing high of 1,465.77 reached the day after the Fed announced the new bond buying Sept. 13.
The index has more than doubled since reaching a 12-year low of 676.53 on March 9, 2009. Next year the index will probably exceed its record of 1,565.15 reached in October 2007, according to strategists’ estimates compiled by Bloomberg News.
Central bank stimulus helped boost gold prices 11 percent last quarter, the most since June 2010, on speculation the efforts will spur demand for the metal as a hedge against inflation.
Bullion futures for December delivery rose 0.2 percent to settle at $1,779.80 an ounce in New York trading yesterday. Treasury 10-year yields fell 1 basis point to 1.62 percent yesterday from 1.88 at the end of last year. The yield tumbled to a record low of 1.38 percent on July 25.
While reducing borrowing costs, the Fed hasn’t made steady progress toward meeting its mandate to achieve full employment. According to the median estimate in a Bloomberg Survey of economists, the Labor Department will report tomorrow that the economy added 115,000 jobs in September. The unemployment rate probably rose to 8.2 percent from 8.1 percent, according to their forecasts.
‘Oomph We Need’
“I don’t see anything that’s going to get us out of this modest pace and give us the oomph we need,” said Josh Feinman, the New York-based global chief economist for DB Advisors, the Deutsche Bank AG asset management unit that oversees $220 billion and a former senior economist at the Fed’s board of governors.
“The economy is just stuck in low gear, even though the recovery is more than three years old,” he said. “It’s very unsatisfying and it’s very sluggish. The data have been mixed.”
Employment is a key theme for Republican presidential candidate Mitt Romney, a former Massachusetts governor and private-equity executive who says he would be better at creating jobs than President Barack Obama. The jobless rate has stayed above 8 percent since February 2009.
Romney Gains
Romney cut Obama’s lead in a national NBC/Journal poll released this week. The president led Romney, 49 percent to 46 percent, among likely voters, down from 50 percent to 45 percent two weeks earlier. Polls in swing states released Oct. 3 show Romney pulling closer to Obama in Florida and Virginia while continuing to trail in Ohio.
The world’s largest economy will probably expand by about 2 percent this year, boosted by rising home prices, employment and consumer confidence, according to Ellen Hughes-Cromwick, chief economist at Dearborn, Michigan-based Ford Motor Co., the second-biggest U.S. automaker.
The economy in the U.S. grew less than previously forecast in the second quarter, reflecting slower gains in consumer spending. Gross domestic product rose by 1.3 percent from April through June after expanding at a 2 percent rate in the first quarter and 4.1 percent in the fourth quarter.
“Economic fundamentals are still pointing toward modest economic growth,” Hughes-Cromwick said in an Oct. 2 conference call with industry analysts. “There are now signs of a better housing recovery ahead.”
