Fed sees steady recovery despite turmoil, minutes show
By Neil Irwin,
Global turmoil and potentially steep budget cuts have heightened economic uncertainty, Federal Reserve leaders concluded at their last policy meeting. Yet the nation’s recovery was still on track, the officials said in choosing to maintain their current bond-buying policy.
Fed officials held to the expectation that the U.S. economy will keep expanding in 2011, according to minutes released Tuesday of the March 15 meeting. They will continue buying $75 billion in Treasury bonds each month as previously planned, but the minutes gave no hints that the Fed will extend the program after that.
The document reveals a mix of views among Fed officials on when to start pulling away from the banks’ extreme efforts to support growth.
“A few participants indicated that economic conditions might warrant a move toward less-accommodative monetary policy this year; a few others noted that exceptional policy accommodation could be appropriate beyond 2011,” the minutes said.
But even as policymakers maintained a steady-as-she-goes monetary policy, they saw a slew of risks on the horizon.
Leaders of the central bank “continued to see some downside risks from the banking and fiscal strains in the European periphery, the continuing fiscal adjustment by U.S. state and local governments, and the ongoing weakness in the housing market.” Several officials “also noted the possibility of larger-than-anticipated near-term cuts in federal government spending,” the minutes said.
The economic implications of the Japanese earthquake that had occurred a few days before the meeting “were not yet clear,” the minutes said. And the potential for “more widespread disruption in oil production, and thus for a larger jump in energy prices,” raised the risks of weakened growth and higher inflation.
Fed officials discussed rising prices for fuel and other commodities extensively, according to the minutes. But they showed little concern that the recent run-up in energy costs would affect underlying inflation trends and said the effect of higher oil prices “would be transitory.”
Still, the minutes made clear that Fed leaders would reevaluate if rising fuel prices persist and appear to raise consumers’ expectations of inflation over the longer run. When people expect prices to start rising, inflation can become self-fulfilling.
“A significant increase in longer-term inflation expectations could contribute to excessive wage and price inflation, which could be costly to eradicate,” the minutes said.