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Fed divided on monetary policy action, minutes show

Federal Reserve officials disagreed sharply last month over how to address a stubbornly weak economy, eventually settling on an unconventional step to try to boost growth, according to a newly released document.

Minutes of the Fed’s Sept. 20-21 meeting show that there are senior Fed officials in disagreement with the central bank’s policy. Some think the Fed has done too much to try to encourage growth and that the steps are potentially counterproductive, and others think the Fed should move more aggressively to address an ailing economy.

At that meeting, the Fed unveiled a new strategy for helping the economy: shifting $400 billion of its holdings of shorter-term Treasury bonds into longer-term bonds in an effort to push down long-term interest rates such as those on mortgages.

Three officials from regional Fed banks — Richard Fisher of Dallas, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia — dissented from that decision, viewing the benefits to the economy as minimal and the risks of inflation as significant.

But minutes released Wednesday show that others in the Fed were arguing for more aggressive action, although they do not identify individuals. Two members of the policy committee “said that current conditions and the outlook could justify stronger policy action,” according to the minutes. Still, they supported the decision to adjust the Fed’s portfolio holdings, “as it did not rule out additional steps at future meetings.”

Additional action could take the form of the Fed once again injecting money into the economy by buying bonds, a third round of a strategy known a quantitative easing, or QE3. It appears that strategy will be on the table if the economy worsens further, as the minutes said that “a number of participants” saw such bond purchases “as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted.”

However, reflecting disagreement within the central bank, others judged that such a strategy “would be more likely to raise inflation and inflation expectations than to stimulate economic activity” and should be used only if there is a risk of falling prices.

“They’re looking at the data and saying, ‘Jeez, this economy is just not giving us what we want,’ ” said John Silvia, chief economist at Wells Fargo. “It’s got to be disappointing to have 1 to 2 percent growth having done all they have on monetary policy. They don’t have a lot of big tools left, so there is some hesi­ta­tion.”

With the economy stuck in a rut of slow growth and high unemployment, the divide over what direction the Fed should go is a reflection of the uncertain times. Other global central banks are facing similar quandaries: At the Bank of England, there have been policy meetings in the past two years in which officials dissented in opposite directions. And two senior policymakers at the European Central Bank have resigned this year, amid discontent with steps the ECB has taken to address the continent’s debt crisis.

It was clear that many at the Fed are skeptical that further monetary easing will have much impact on economic growth. “A number saw the potential effects on real economic activity as limited or only transitory, particularly in the current environment,” the minutes said, citing the credit crunch and consumer and business uncertainty about the nation’s economic outlook.

The policymakers seem to have attained more consensus around moving toward making monetary policy contingent on specific economic conditions.

“Most participants indicated that they favored taking steps to increase further the transparency of monetary policy,” the minutes said. And most of the policymakers also “saw advantages in being more transparent” about which conditions would prompt them to change policy strategy.

For example, Chicago Fed President Charles Evans has said in speeches that the central bank could pledge to keep rates very low until either unemployment falls below 7.5 percent or inflation rises above 3 percent. No specific numbers on those indicators were mentioned in the minutes.

The report raises the possibility that the Fed could introduce specific guidelines as part of its quarterly unveiling of economic forecasts, when Fed Chairman Ben S. Bernanke also holds a news conference. The next such meeting is Nov. 1-2.

“The minutes leave us with the impression that the Committee is likely to change communications at the upcoming meeting in order to more explicitly tie [its interest rate policies] to economic conditions,” Michael Feroli, an economist at J.P. Morgan Chase, said in a report.



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