Bloomberg News

Fed Bond Purchase Option Kept in Reserve as Officials Weigh Data

February 24, 2012

Feb. 16 (Bloomberg) -- Federal Reserve officials are keeping open the option of a third round of bond purchases in case the economy weakens or inflation stays low.

“A few” members of the Federal Open Market Committee said economic conditions could warrant buying assets “before long,” and others indicated that action would become necessary if the “economy lost momentum” or price gains seemed likely to remain lower than the Fed’s 2 percent goal, according to minutes of their Jan. 24-25 meeting released yesterday in Washington.

Policy makers willing to wait for evidence of weakness in the economy before taking further action are probably in the majority, said Roberto Perli, a former senior staff economist in the central bank’s division of monetary affairs, which drafts the language in the Fed’s communications.

“The bottom line is there is a threshold” for asset purchases, said Perli, a managing director at International Strategy and Investment Group Inc. in Washington. “Only two or three members think we are already there. A more substantial group is open to the idea but thinks economic conditions need to get somewhat worse.”

Central bankers at their last meeting adopted a plan to hold interest rates near zero at least through late 2014 to spur growth and reduce unemployment, extending a previous date of mid-2013. The date was extended to provide “more accommodative” financial conditions, the minutes said.

Consumer Credit

The jobless rate fell to the lowest level in three years in January, while consumer credit racked up its biggest two-month gain in a decade at the end of 2011. The Standard & Poor’s 500 Index had its best January in 15 years. The index fell 0.5 percent to 1,343.23 in New York yesterday amid concern that Greece was moving closer to default, leaving it up 6.8 percent this year.

“All the latest economic indicators point to an economy that does not require additional action on the part of the central bank,” said Christopher Rupkey, chief financial economist at Bank of Tokyo Mitsubishi UFJ Ltd. in New York. “I am baffled why this Fed would consider more stimulus at this point.”

A Labor Department report on Feb. 3, after Fed policy makers met, showed that the unemployment rate unexpectedly dropped to 8.3 percent.

Factory production rose last month, reflecting gains in demand for automobiles and business equipment that may keep manufacturing at the forefront of the expansion. Output at factories increased 0.7 percent after a revised 1.5 percent gain in December that was the largest in five years, the Fed reported yesterday.

Appetite Is Lower

“The improvement in various indicators since the time of the last meeting probably means that for the average FOMC member the appetite for additional purchases is lower,” said Dan Greenhaus, chief global strategist for BTIG LLC in New York.

Fed Chairman Ben S. Bernanke repeated the low-rate pledge after the jobs report, and said the decline in the unemployment rate may mask weakness in the labor market.

“It is very important to look not just at the unemployment rate, which reflects only people who are actively seeking work,” Bernanke said in response to a question during testimony in Congress. “There are also a lot of people who are either out of the labor force because they don’t think they can find work” or who have taken part-time jobs.

Other policy makers have highlighted the positive reports, with St. Louis Fed President James Bullard saying they have “been surprising to the upside.”

Threat of Deflation

“I need to see significant deterioration in the economy and some threat of deflation or inflation moving significantly below our inflation target before I would consider more QE,” Bullard, who doesn’t vote on policy this year, said in an interview on Feb. 3.

Among companies expanding payrolls is Caterpillar Inc., the world’s biggest maker of earthmoving equipment. The Peoria, Illinois-based company plans to hire more workers this year as it expands facilities, including in Victoria, Texas, and Winston-Salem, North Carolina, Chief Financial Officer Edward Rapp said this month in an interview.

Fed officials last month acknowledged “further gradual improvement” in the labor market and said financial-market stresses had eased as the European Central Bank took action to help Europe’s debt crisis. Most FOMC participants continued to see risks that growth would be lower than their forecasts and the unemployment rate higher, the minutes showed.

U.S. central bankers expect the economy to grow 2.2 percent to 2.7 percent this year, according to the central tendency of their January forecasts. They see the jobless rate ending the year at 8.2 percent to 8.5 percent, and prices rising 1.4 percent to 1.8 percent, below their 2 percent goal.

“We will get QE3 if they think we have slippage in the economy,” said Michael Hanson, senior U.S. economist at Bank of America Corp. in New York, referring to a third round of so- called quantitative easing. “A couple months of worse data would bring down their forecasts, and then additional easing happens.”

--Editors: Chris Wellisz, James L Tyson

To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net; Craig Torres in ?? at ctorres3@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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