Most members of the Federal Reserve’s policy-setting body had their hands on the trigger of further stimulus last month, leaving little doubt that the U.S. central bank will seek to lower interest rates in the months ahead.
The minutes of the Federal Open Market Committee’s Sept. 21 meeting state that the policy makers believed that further monetary policy “accommodation may be appropriate before long,” indicating Fed Chairman Ben Bernanke could launch a program of financial asset purchases, or “quantitative easing,” as early as Nov. 3, when the committee concludes its next meeting.
Fed officials expressed little fear that the economy risked sliding back into recession, and they put “small odds” on outright deflation. But business contacts were telling policy makers that companies have little ability to raise prices, as consumers, burdened by debt and a high unemployment rate, are reluctant to spend money, according to the minutes, which were released in Washington on Tuesday.
There also was considerable concern that the economy is growing too slowly to create a significant number of jobs, putting the Fed at risk of failing in its mission to generate full employment.
“Several members noted that unless the pace of economic recovery strengthened or underlying inflation moved back toward a level consistent with the committee’s mandate, they would consider it appropriate to take action soon,” the minutes said.
The report adds texture to the statement the committee released after its September meeting, when it said the Fed was falling short of its dual mandate to maintain price stability and full employment and that it was “prepared to provide additional accommodation if needed.”
Since then, a government report showed payrolls decreased by 95,000 in September, suggesting the U.S. economy continues to struggle, while several members of the FOMC, including New York Fed President William Dudley, have indicated publicly that they favour action.
“We think that incoming data, including the employment report released last Friday, have not shown significant improvement to sway the FOMC members from thinking that further stimulus is appropriate,” economists at Barclay’s Capital said in note Tuesday. “We continue to expect the Fed to initiate a new round of incremental purchases at the November meeting.”
The greenback fell to a record low against the Swiss franc, tracked near a 15-year low against the yen, and lost more ground against its Canadian counterpart.
Ongoing talk of further monetary stimulus by the Fed causes a mixed reaction in financial markets, reflecting uncertainty over how effectively quantitative easing, or QE, will work.
The strategy would see the Fed create money to buy longer-term financial assets, most likely Treasuries. The goal: create demand for government debt, which will put downward pressure on the yields that set the tone of other interest rates; and push private investors into other assets, such as corporate bonds, further reducing the cost of borrowing.
With interest rates low in the world’s largest economy, investors are rushing to find yield elsewhere, putting upward pressure on the currencies of fast-growing emerging markets, many of which are trying to slow the flow through intervention or capital controls.
There also is a widening policy gap between the U.S. and Europe. Axel Weber, the head of the German central bank and a governor at the European Central Bank, said in a speech in New York Tuesday that the ECB’s bond-purchase program “should now be phased out permanently.” He also said “exiting too late” from the emergency stimulus plans that central banks put in place to fight the financial crisis poses a bigger risk than “exiting too early,” according to a report by Bloomberg News.
