Fed officials open to stimulus action, minutes show

February 15, 2012

The Federal Reserve is actively considering major new action to boost the economy, but it still may not pull the trigger unless the fledging economic recovery stalls, according to minutes of the central bank’s January meeting released Wednesday.

Fed officials do not believe that the recent, rapid decline in unemployment will continue at the same pace going forward, the minutes show. As a result, “a few” officials favor expanding the Fed’s un­or­tho­dox measures to boost economic growth.

Other officials, while not ready to endorse new steps, are open to additional measures if the economy declines.

If carried out, these measures would likely take the form of mortgage bond purchases. The purchases would make it easier for people to buy homes or refinance their existing mortgages, freeing up cash to spend elsewhere.

Independent economists are divided on whether the central bank will take action. “All will depend on the economy’s performance,” said Nigel Gault, chief U.S. economist at IHS Global Insight, in a research memo. “ [I]t’s a close call.”

The Fed is being pulled in two directions. On one hand, it has clearly been failing to achieve one of its missions — keeping the unemployment rate down. On the other hand, recent economic data have suggested that the economy is starting to pick up steam and overly aggressive action by the Fed could spark inflation, as some Fed officials worry.

The details of the January meeting came three weeks after the Fed made clear that the predominant risk is unemployment failing to come down fast enough.

After that meeting, the Fed announced that it plans to keep interest rates near zero through 2014 — 18 months longer than originally projected. The central bank cited concern that unemployment would remain elevated for several more years.

Fed policymakers projected that the unemployment rate will be around 8.5 percent for much of this year — it is currently 8.3 percent — and will fall to between 6.7 and 7.6 percent by the end of 2014.

Fed Chairman Ben S. Bernanke has suggested that the Fed will take additional steps to help the economy unless unemployment declines faster than anticipated.

“If recovery continues to be modest and progress on unemployment very slow, and if inflation appears likely to be below target for a number of years out . . . then I think there would be a very strong case, based on our framework, for finding . . . additional tools for expansionary policies or to support the economy,” he said last month.

The Fed’s minutes were somewhat more detailed than usual because of Bernanke’s push to increase openness at the central bank.

However, several analysts said that the minutes did not shed much new light on the Fed’s thinking. In fact, the minutes revealed there was concern at the central bank that increased openness might not pay benefits.

Fed governor Daniel Tarullo decided against voting to approve a lengthy statement clarifying the Fed’s strategy for managing economic policy “because he questioned the ultimate usefulness of the statement,” the minutes said.

The minutes show that Fed officials believe they have reason to worry that recently stronger economic indicators could prove transient. In particular, officials are concerned about the effects of the financial turmoil in Europe.

“A number of factors were seen as likely to restrain the pace of economic expansion,” the Fed minutes said, “including the slowdown in economic activity abroad, fiscal tightening in the United States, the weak housing market, further household deleveraging, high levels of uncertainty among households and businesses, and the possibility of increased volatility in financial markets until the fiscal and banking issues in the euro area are more fully addressed.”

But the economic data on Wednesday suggested strength in the economy. For instance, the manufacturing activity charged along in the final two months of last year and is now up 18 percent from its early 2009 lows. In addition, an index measuring housing activity jumped significantly last month, reaching its highest point since the middle of 2007.

“Overall, the numbers indicate that growth was very solid at the end of 2011, and that has continued in 2012,” economists at PNC Bank said in a report. “Manufacturing remains a source of strength in the recovery, and will continue to lead overall growth.”

Zachary A. Goldfarb is policy editor at The Washington Post.
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