WASHINGTON – Federal Reserve officials in their last meeting discussed a “number of policy tools” that the central bank might use to further stimulate the economy in the face of the weakening recovery, an official account released on Wednesday said, but they remained in wait-and-see mode.
“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” the account of the meeting that ended Aug. 1 said.
With few signs of a substantial and sustainable strengthening evident this summer, the report will likely solidify investors’ expectations that the bank will take new measures this fall.
The participants in the meeting discussed a number of options to give more support to the economy, the minutes said. Those include keeping the federal funds rate near zero for a longer period than currently indicated. The Fed has said it will keep that rate low through 2014.
“It was noted that such an extension might be particularly effective if done in conjunction with a statement indicating that a highly accommodative stance of monetary policy was likely to be maintained even as the recovery progressed,” the meeting notes said.
“A few” members suggested “replacing the calendar date with guidance that was linked more directly” to the economy, or removing any guidance as to when the rate would increase.
The committee also discussed undertaking a new round of aggressive asset purchases to push down interest rates and prod investors to invest now.
“A few participants” expressed concern that new measures might “increase the risks to financial stability or lead to a rise in longer-term inflation expectations.”
But “many participants” said that such a program would help the recovery by pushing down long-term interest rates and easing financial strains. “Some” participants also argued that new measures would boost confidence.
After great anticipation ahead of its last meeting, the Fed’s policy-making committee decided against taking new action to bolster the American economy when it met at the turn of the month. It repeated its pledge to support the economy if necessary, using somewhat stronger language than it had in past statements.
“The committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability,” it said.
The central bank said that the recovery seemed to have lost steam in the first half of 2012, with growth to “remain moderate over coming quarters and then to pick up very gradually” and the unemployment rate to fall “only slowly.”
The unemployment rate remains stuck above 8 percent, and the spring and summer have seen a slew of weak economic data in manufacturing, consumer sentiment and industrial production, among other indicators, though there have been new signs of life in the housing market.
The persistent headwinds identified by the Fed and other economic analysts include high unemployment, a still-depressed housing sector and financial market strain emanating from the sovereign-debt crisis in Europe.
In June, the Fed cut its official forecasts for growth both this year and next. It said it anticipates the economy to expand 1.9 percent to 2.4 percent in 2012, down from the forecast of 2.4 percent to 2.9 percent growth it made in April. In 2013, it anticipates growth of 2.2 percent to 2.8 percent, down from the 2.7 percent to 3.1 percent it forecast in April.
The Fed is already engaged in ambitious programs to support demand, bolster employment and support the wan recovery. It has cut its short-term interest rates to close to zero and held them there to encourage investment, and has said it will continue to keep interest rates low at least through 2014. It is also engaged in a bond-buying program through the end of this year to bring down long-term interest rates.
But the latest economic weakening – when once again the recovery lost momentum – has raised investor speculation that the Fed might take yet more measures to support the economy.
Many market participants are betting on a massive new round of bond-buying — called “quantitative easing” by central bankers and colloquially known as “QE3,” since the Fed has launched two prior efforts.
But some Federal Reserve officials have expressed hesitancy about whether such measures would work. The so-called hawks on the committee – those more concerned with the specter of rising inflation – have also argued that the Fed should abstain.
Some economic data has come in better than expected recently. Most important, there are signs of a nascent housing recovery, with home prices and sales volumes picking up and builders more confident in breaking ground. Although the unemployment rate did not fall in July, hiring picked up.
Another looming problem for the American economy is the “fiscal cliff,” as Ben S. Bernanke, the Fed chairman, has termed the tax increases and spending cuts due to hit in 2013. On Wednesday, the Congressional Budget Office warned that if lawmakers do not delay the tax increases and spending cuts, the hit could throw the country back into recession.
“The most effective way that the Congress could help to support the economy right now would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery,” Mr. Bernanke told the Senate Banking Committee this summer.
But Congress has taken no action thus far, given the looming presidential and Congressional elections.
Mr. Bernanke will next be able to elaborate on his view of the economy at an annual monetary policy conference held in Jackson Hole, Wyo., at the end of August.
The next chance for the Fed’s policy-making committee to take new measures comes when it meets in Sept. 12-13 followed by a news conference with Mr. Bernanke.
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