A few Fed policymakers favored ‘more substantial’ move, minutes show
By Neil Irwin,
Some Federal Reserve officials were inclined to move more aggressively than the central bank did at its meeting three weeks ago to try to address the weakening economy, according to new minutes of the meeting that show a committee deeply worried about the outlook.
The Fed leaders who gathered on Aug. 9 to shape the nation’s monetary policy thought the information since their previous meeting indicated “that economic growth so far this year was considerably slower than they had expected.” They noted that the labor market was worsening, household spending growth slowing, and consumer and business confidence weakening.
Against that backdrop, the Fed decided to announce that it envisions keeping interest rates very low through the middle of 2013, viewing this as “a measured response to the deterioration in the outlook” and “a possible way to reduce interest rates and provide greater support to the economic expansion,” the minutes said. Some wanted to go further: “A few members” of the Fed policy committee argued that the deterioration in the economy “justified a more substantial move at this meeting,” though they were willing to go along because the policy shift was in the direction they preferred.
The meeting minutes do not identify those officials wanting more aggressive action, but the Federal Reserve Bank of Chicago president, Charles Evans, essentially identified himself as one in a CNBC interview Tuesday, saying, “I think we need to do more.”
The minutes added clarity on what doing more might consist of. “Some” participants at the meeting said the Fed could buy more Treasury bonds to try to push money into the economy, essentially launching a third round of “quantitative easing,” the strategy undertaken late last year when the economy was dipping. Others suggested shifting the Fed’s portfolio into longer-term bonds, which might help the economy by pushing down mortgage and other interest rates. And still others suggested cutting the 0.25 percent rate that the Fed currently pays banks for money they park at the central bank.
As was previously announced, three members of the Fed committee had the opposite impulse — dissenting from the decision because they preferred not to include language about keeping rates low for the next two years. Thus, the Fed again finds itself in a period of wide disagreement, with people arguing diametrically opposite positions.
In some ways, the current situation, with the economy again at risk of slipping into a recession, presents the Fed with more difficult decisions than did a similar moment last year. Then, inflation was clearly coming in well below the level of 2 percent or so that the Fed aims for, allowing plenty of latitude to act. Now, inflation is around that target, meaning that any further monetary easing risks pushing inflation too high.
Fed Chairman Ben S. Bernanke said in a speech Friday that the central bank “is prepared to employ its tools as appropriate” to support the economy and keep prices stable. However, he declined to give specific hints that the Fed will take action at its Sept. 20-21 meeting.