Fed leaders had varied views on August policy action

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By Neil Irwin
Washington Post Staff Writer
Tuesday, August 31, 2010; 7:41 PM

Federal Reserve officials were divided at their Aug. 10 meeting over whether they should resume purchases of Treasury bonds and what impact the move could have on the nation's economy, according to minutes released Tuesday.

In the end, the Fed's policymaking committee elected to reinvest money from maturing mortgage securities in government bonds by a 9 to 1 vote. But the minutes show that there was wider disagreement behind closed doors than that final tally may suggest.

Most members of the Federal Open Market Committee thought it unwise to allow the Fed's balance sheet to contract, which would have happened were it not for their action, because that would tighten monetary policy when the economic outlook was weakening, according to the minutes.

However, other members "noted that the magnitude of the tightening was uncertain, and a few thought that the economic effects of reinvesting principal . . . likely would be quite small."

The minutes did not identify specific committee members.

A few panel members also worried that the action "could send an inappropriate signal to investors about the Committee's readiness to resume large-scale asset purchases." And another member argued that it would complicate the Fed's efforts to exit from its unconventional steps to prop up the economy.

According to the minutes, however, several members had concerns in the other direction. They emphasized that the Fed "would need to consider steps it could take to provide additional policy stimulus if the outlook were to weaken appreciably further."

In a speech Friday, Chairman Ben S. Bernanke said that the Fed would consider launching a new bond purchasing program to try to prop up the economy only if conditions deteriorate more than he now expects or if deflation becomes a risk.

One Fed policymaker, Kansas City Federal Reserve Bank President Thomas M. Hoenig, dissented from the Aug. 10 decision, in part because he objected to resuming asset purchases. However, the regional bank presidents rotate voting slots, and it is likely that there are other Fed presidents who are not voting members this year but had similar reservations. Jeffrey M. Lacker of Richmond and Charles I. Plosser of Philadelphia, for example, have shown wariness about such Fed action in public statements.

But there are also several members who have signaled openness to new steps to try to boost the economy, including Eric S. Rosengren of Boston and James Bullard of St. Louis.

There appeared to be greater consensus among Fed leaders about the state of the economy than about what to do about it.

Most meeting participants, who included the five then-serving Fed governors and 12 presidents of Fed regional banks, "saw the incoming data as indicating that the economy was operating farther below its potential than they had thought, that the pace of recovery had slowed in recent months, and that growth would be more modest during the second half of 2010 than they had anticipated" at their June policy meeting.

But the Fed officials did not see much risk of deflation, a dangerous cycle of falling prices. "No member saw an appreciable risk of deflation," the minutes said, though some saw a risk that inflation would continue to decline.


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