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.
Chairman Ben S. Bernanke and his policy making colleagues announced the Fed will buy $40 billion of mortgage bonds every month to spur growth and reduce unemployment. A Labor Department tomorrow will probably show that the jobless rate rose last month to 8.2 percent from 8.1 percent, according to the median estimate in a Bloomberg Survey of economists.
The minutes contain a detailed discussion of the costs and benefits of bond buying, with a few FOMC participants expressing “skepticism” the program could help, and several saying the purchases may “complicate the committee’s efforts to withdraw monetary policy accommodation when it eventually became appropriate to do so.”
The Standard & Poor’s 500 Index (SPX) maintained gains after the release of the minutes, rising 0.7 percent to 1,461.40 today in New York. Yields on the benchmark 10-year Treasury note remained higher, rising 0.06 percentage point to 1.67 percent.
Many participants said “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.
“It confirms the sense that the committee continues to move toward numerical guidelines and thresholds for rate hikes,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York and a former researcher for the Fed Board in Washington. “That’s what really stuck out here, that it’s a preference of most on the committee and it’s just a matter of working out the details.”
Most participants 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.
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.”
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 third round of quantitative easing 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 until mid-2015 “doesn’t mean that we expect the economy to be weak through” that date.
The minutes reiterated that theme, saying 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.”
The minutes said policy makers 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.
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.
While reducing borrowing costs, the Fed hasn’t made steady progress toward meeting its mandate to achieve full employment. The jobless rate has stayed above 8 percent since February 2009.
“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.”
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.
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