Fed divided over more stimulus, meeting minutes show

July 12, 2011

Federal Reserve officials lack a strong consensus over what they should do next in setting the nation’s monetary policy, according to minutes of their last policy meeting, showing a mix of views as to why the U.S. economy remains weak and what, if anything, they should do about it.

At a June 21-22 meeting, some leaders of the central bank argued that if there were no progress reducing unemployment, the Fed should consider further expanding the money supply — which in practice would mean a third round of “quantitative easing,” or buying hundreds of billions of dollars in Treasury bonds.

“Some participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate,” and if inflation pressures dissipated, “it would be appropriate to provide additional monetary policy accommodation,” said minutes from the Federal Open Market Committee meeting released Tuesday afternoon.

That was the most clear acknowledgment to date that at least some Fed policymakers are discussing such a possibility. If anything, the latest economic data — particularly a very weak report on job creation in June that came out last Friday — would tend to make the Fed more open-minded about new steps to bolster growth.

But it also is clear that argument came from only one faction of Fed policymakers, and there is nothing approaching a consensus around further action. Some at the Fed argued that the current situation of moderate inflation with high unemployment suggests there may be more fundamental changes at work in the economy, with workers shifting sectors and losing skills because of long periods of unemployment.

Those structural changes in the economy, these officials argued, “may have temporarily reduced the economy’s level of potential output,” the minutes said. If that’s the case, they added, the Fed may need to start pulling money out of the economy sooner than markets now anticipate.

Fed Chairman Ben S. Bernanke will appear on Capitol Hill on Wednesday for his semi-annual testimony on monetary policy. He is likely to be questioned on the future path of Fed policy.

Even as some at the Fed are pondering a move toward easing monetary policy, the leaders of the central bank also reached agreement on how they will go about ending the era of easy money when the day comes.

First, the Fed would no longer reinvest proceeds of securities it owns when they mature. The value of assets on the Fed's balance sheet, near $3 trillion, would begin to fall. It would change its communications about interest rates, perhaps by no longer promising to keep rates low for an “extended period.” Then it would raise its target for the federal funds rate, near zero since December 2008. Then, the Fed would begin selling securities on its balance sheet over two to three years.

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