Bloomberg News

Several on FOMC Said Easing May Be Needed on Faltering

May 16, 2012

Federal Reserve Chairman Ben Bernanke. Photographer: Luke Sharrett/The New York Times via Redux

Federal Reserve Chairman Ben Bernanke. Photographer: Luke Sharrett/The New York Times via Redux

Several Federal Reserve policy makers said a loss of momentum in growth or increased risks to their economic outlook could warrant additional action to keep the recovery going, minutes of their last meeting showed.

The members of the rate-setting Federal Open Market Committee “indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough,” according to minutes of the panel’s April 24-25 meeting released today in Washington.

Central bankers saw Europe’s debt crisis and a fiscal tightening caused by a failure of U.S. lawmakers to agree on a budget as risks to the recovery, the minutes showed. A discussion of such risks may give central bankers greater scope to ease policy than a focus on indicators such as growth or inflation, said Roberto Perli, a former member of the Fed’s Division of Monetary Affairs staff.

“It is easy to see how downside risks to the forecasts could become large because you have Europe which could hit in the near term, and you have a U.S. fiscal cliff as we approach the end of the year,” said Perli, a managing director at International Strategy & Investment Group in Washington.

Central bankers last month affirmed their plan to hold interest rates near zero at least through late 2014 as they sought to push down an unemployment rate that has stayed above 8 percent for more than three years. Any decision to ease further “still remains data dependent,” Perli said. “It doesn’t sound like they have made up their mind.”

Too-Low Inflation

At the March meeting, “a couple” of FOMC members said additional action may be needed if the economy lost momentum or if inflation were too low.

Stocks fluctuated and Treasuries erased declines after the release of the minutes. The Standard & Poor’s 500 Index fell 0.2 percent to 1,327.51 at 3:40 p.m in New York. The yield on the 10-year Treasury was little changed at 1.76 percent. The yield has dropped from 1.98 percent on April 25.

Policy makers also discussed the conditions for any change in the 2014 horizon for low rates. The minutes cited a lack of confidence in their forecasts as one reason to leave the guidance unchanged.

“Some members recalled that gains in employment strengthened in early 2010 and again in early 2011 only to diminish as those years progressed,” the minutes said. “Moreover, the uncertain effects of the unusually mild winter weather were cited as making it harder to discern the underlying trend in the economic data.”

Jobs Report

Policy makers met before a Labor Department report on May 4 showed U.S. employers added 115,000 jobs in April, the least in six months. The unemployment rate fell to 8.1 percent, the lowest since January 2009, as people left the labor force.

More recent data has allayed concern the job market is cooling. First time claims for unemployment benefits declined to a one-month low of 367,000 in the period ended May 5, Labor Department data showed last week.

At their meeting, Fed officials had detailed discussions about additional communications measures. The Fed staff presented an exercise that showed how policy makers’ views could be portrayed under alternative economic scenarios.

“Some participants stated that exercises using alternative scenarios, with appropriate adjustments, could potentially be helpful for internal deliberations and, thus, should be explored further,” the minutes said. “However, no decision was made at this meeting regarding future exercises along these lines.”

Policy Rules

Fed officials also discussed the usefulness of simple rules as a guide for policy makers and the public. The idea has been promoted by Philadelphia Fed President Charles Plosser in public comments.

“Participants planned to discuss further, at a future meeting, the potential merits and drawbacks of using simple rules as guides to monetary policy” decisions and for communications, said the minutes, which do not identify participants by name.

The Fed today also announced that all meetings will now last two days to allow “ample time” for discussions. Last year, five of the panel’s eight meetings lasted two days, and the others were one-day meetings. Chairman Ben S. Bernanke will now hold press conferences in conjunction with the meetings scheduled for the third month of each quarter, the Fed said.

Operation Twist

The Fed said at its April meeting that the central bank would continue its swap of $400 billion of short-term debt with long-term debt to lengthen the average maturity of its holdings and help lower the interest rate on Treasuries, a move dubbed Operation Twist. The Fed is scheduled to complete the program at the end of June.

Richmond Federal Reserve Bank President Jeffrey Lacker dissented twice at the meeting. He cast a vote against the extension of reciprocal currency swap arrangements with the central banks of Canada and Mexico because he opposes foreign exchange intervention by the Fed and direct lending to foreign central banks, the minutes said.

Lacker also voted against the 2014 pledge in the FOMC’s statement because in his view “an increase in the federal funds rate was likely to be necessary by mid-2013 to prevent the emergence of inflationary pressures,” the minutes said.

Stocks and bond yields have fallen since the central bank’s most recent meeting on April 24-25 as data on the labor market weakened and amid concern Europe’s debt crisis is worsening.

Stocks Decline

The S&P 500 index fell 4.3 percent since the Fed’s meeting through yesterday on signs of weakness in the job market and concerns the European debt crisis was deepening.

The central bank said in forecasts released with its April statement that it expects the unemployment rate to fall to 7.8 percent to 8.0 percent by the final three months of this year. Gross domestic product is likely to rise by 2.4 percent to 2.9 percent this year, according to the so-called central tendency estimates that exclude the highest and lowest forecasts.

Economic growth slowed to a 2.2 percent annual rate in the first quarter of this year from 3 percent in the final three months of 2011.

A stabilization of housing, the industry at the heart of the financial crisis, may boost the economy.

Builders broke ground on more homes than anticipated in April, Commerce Department data showed today. Housing starts rose 2.6 percent to a 717,000 annual rate. The National Association of Home Builders/Wells Fargo index of builder confidence jumped to a five-year high in May, a report from the group showed yesterday.

‘Much Better’

“The headlines for the last three months in housing have been much better,” Douglas Yearley, the chief executive of Toll Brothers Inc., the largest U.S. luxury home builder, said in a May 9 teleconference. “Unemployment is beginning to come down and I think everybody just feels better about where housing is, where the economy is, and we’re all seeing the benefit of that.”

Industrial production, a mainstay of the expansion, is extending its gains, a report from the Fed showed today.

Output at factories, mines and utilities increased 1.1 percent last month, the most since December 2010, after a 0.6 percent decline in March that was revised from no change, the Federal Reserve reported today in Washington. Economists forecast a 0.6 percent gain, according to the Bloomberg News survey median.

To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

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


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