The minutes said such a tool would allow the FOMC to offer an overnight, risk-free instrument to a “wide range of market participants,” and possibly improve their ability to keep short-term rates at desired levels.
FOMC participants continued to expect economic growth to pick up in the second half of 2013 and “strengthen further.” The minutes said “a number” of participants were somewhat less confident than they had been in June due to higher mortgage rates, higher oil prices, slow growth in U.S. export markets, and the risk that fiscal restraint might not decrease.
The FOMC affirmed a pledge on July 31 to continue bond buying until seeing signs “the outlook for the labor market has improved substantially.” While employers in July expanded payrolls by 162,000 workers, the smallest gain in four months, the jobless rate fell to a more than four-year low.
Payroll growth over the past six months has averaged almost 200,000, compared with a 141,000 average in the six months before September, when the FOMC announced a third round of bond buying. Also, jobless claims fell to 320,000 in the week ended Aug. 10, the least since October 2007.
“We’ve come a long way,” said Joe Carson, who helps oversee $434.6 billion as director of global economic research at AllianceBernstein LP in New York. “The unconventional policy of QE has given you a lot of bang for the buck,” he said before release of the minutes. “The Fed should be pretty happy with the outcome they’ve had from this because they’ve had growth with little inflation.”
With inflation well below the FOMC’s 2% target, policy makers have leeway to press on with bond buying that has pumped up the Fed’s balance sheet to a record $3.65 trillion. Their preferred inflation gauge, the personal consumption expenditures index, increased 1.3% in the 12 months ended in June. Excluding food and energy, the index rose 1.2%.
Chicago Fed President Charles Evans, a voting member of the FOMC this year who dissented twice in 2011 in favor of easier policy, said this month he wouldn’t rule out a reduction in bond purchases at the meeting next month.
Three other Fed district bank presidents who don’t hold a vote this year -- Sandra Pianalto of Cleveland, Richard Fisher of Dallas and Dennis Lockhart of Atlanta -- also expressed openness this month to a dialing down in so-called quantitative easing in September.
St. Louis Fed President James Bullard, who has backed continued bond buying, said policy makers should be careful not to change course based solely on their economic outlook.
FOMC forecasts “have tended to be too optimistic,” Bullard, who votes on policy this year, said in an Aug. 14 speech. “Caution is warranted in taking policy action based on forecasts alone.”
FOMC participants predicted in June that gross domestic product will grow this year from 2.3% to 2.6%. During the second quarter, GDP rose at a 1.7% annualized rate, after a 1.1% gain in the first quarter, according to the Commerce Department.