THE US Federal Reserve considered even more-drastic options to stimulate the economy before it settled on buying $600 billion in bonds, according to minutes of its November meeting released yesterday that showed a resolute but fractured central bank.
Fed officials sharply revised down their forecasts for economic growth next year, and saw unemployment at significantly higher levels than they had been at the last time they issued official forecasts in June.
Most participants in the Federal Open Market Committee (FOMC), the Fed’s policy-setting arm, backed the plan to ramp up asset purchases in an effort to bring down long-term interest rates and try to nudge economic activity up a notch. In a rare, unscheduled meeting held via video conference on October 15th, policy makers debated a range of new avenues for policy, including whether to target a long-term interest rate in what would have been a radical change to its monetary policy.
Although the Fed rejected this policy, it suggests that targeting a long-term rate – such as the yield on 10-year Treasury securities – might be an option if inflation continues to fall in spite of the new $600 billion round of quantitative easing, nicknamed QE2.
It discussed enhancing communications by instituting news briefings by chairman Ben Bernanke.
The Fed has kept the video conference a secret for the last month. It means that its (FOMC) had already discussed many of the important issues about QE2 before the November meeting at which it was launched.
The US economy grew 2.5 per cent in the third quarter, the commerce department reported yesterday, a bit faster than a previous estimate of 2 per cent, but still not quick enough to put a dent in the nation’s 9.6 per cent unemployment rate.
Against that backdrop, the Fed minutes depicted the November policy move as in part an insurance policy against the threat of further disinflation – and potentially even a corrosive bout of deflation.
FOMC members slashed their growth and inflation forecasts for the next few years and sharply increased their expectations of unemployment. In a crucial argument supporting the case for QE2, most of the FOMC forecast that core inflation in 2013 will be between 1.1 and 2 per cent. That justifies action because the Fed’s objective is “about 2 per cent or a bit below”.
Still, not all Fed officials believed the new policy, which has raised controversy both at home and abroad, would help lift the economy out of its doldrums.
In fact, “several” participants believed a further increase in Fed credit to the banking system, already around $2.3 trillion after measures undertaken during the financial crisis, risked future inflation. – (Reuters/ The Financial Times Limited 2010)
