By Neil Irwin
Washington Post Staff Writer
Tuesday, October 12, 2010; 8:00 PM
Many Federal Reserve policymakers were leaning toward new action to boost the economy at their last meeting, but decided to gather additional information and more carefully analyze their strategy before making any moves, according to minutes of the meeting.
The minutes of the Sept. 21 meeting, released Tuesday, offer a portrait of a monetary policy committee with significant divisions, but one that appears more inclined to act to strengthen a faltering economy and increase inflation above its current rock-bottom levels.
Fed policymakers meet again Nov. 2-3, and forecasters widely expect them to announce large-scale purchases of government bonds in order to stimulate the economy, though the size, timing, and strategy of those purchases remain an open question.
Several committee members, the minutes said, noted that unless growth recovered or inflation rose, they "would consider it appropriate to take action soon." They were wary of acting at the September meeting, preferring to wait and gather more data on the economy.
"In light of the considerable uncertainty about the current trajectory for the economy, some members saw merit in accumulating further information about reaching a decision about providing additional monetary stimulus," said the minutes of the Federal Open Market Committee. "In addition, members wanted to consider further the most effective framework for calibrating and communicating any additional steps to provide such stimulus."
With its target for short-term interest rates, the Fed's normal tool for managing the economy, already near zero, the central bank can only turn to unconventional steps to try to boost growth. The approach most directly mentioned in the minutes was to buy Treasury bonds as a means to expand the money supply.
Fed leaders also suggested changes in the way they talk about their goals for inflation and the future course of monetary policy, according to the minutes.
"Meeting participants discussed several possible approaches to providing additional accommodation but focused primarily on further purchases of longer-term Treasury securities and on possible steps to affect inflation expectations," said the minutes.
If people expected inflation to be higher in the future, that would give them greater incentive to spend money now, before prices rise. That could in turn create an immediate boost to economic growth.
Some Fed officials are apparently considering even less conventional ways to boost the public's inflation expectations. One approach would be to provide "more detailed information about the rates of inflation" that central bank officials consider consistent with price stability, a target that is widely understood to be just under 2 percent, but is not an official goal of the Fed. If the Fed were more explicit about an inflation target, expectations about price increases might rise to that level.
A second option discussed at the meeting, according to the minutes, would be "targeting a path for the price level rather than the rate of inflation." That means, essentially, that the Fed would pledge to make up for lower inflation now with higher inflation later.
Still, there is clear dissent within the committee, by Fed officials who view any new measures as likely to be ineffective and potentially endangering the central bank's credibility as an inflation fighter.
As for the economy overall, Fed officials did not consider a return to recession as likely, but they hardly seemed confident about the outlook. Staff economists lowered their projections for economic growth in the second half of 2010 and in 2011.
"A number of participants observed that the sluggish pace of growth and continued high levels of slack left the economy exposed to potential negative shocks," although they judged the economic recovery to remain underway and "generally expected growth to pick up gradually next year."