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Fed push for stimulus signals more easing ahead

Fed chairman Ben Bernanke

Alex Wong/Getty Images

The dissenters on the Federal Reserve's policy committee get most of the attention, but there are almost as many who would support more aggressive stimulus policies, suggesting the U.S. central bank will counter any deterioration in economic growth with new measures.

Two members of the Federal Open Market Committee (FOMC) favoured a "stronger" response to persistently weak unemployment than was ultimately agreed by policy makers last month, newly released minutes of their Sept. 20-21 meeting show.

It was at that gathering that Fed chairman Ben Bernanke and six others on the committee overpowered the opposition of three regional Fed presidents to implement a $400-billion (U.S.) program to lower longer-term interest rates by selling from its holdings of shorter-term debt to purchase Treasury securities dated to mature in six years or longer.

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The dissensions were known because their names – Dallas Fed president Richard Fisher, Minneapolis Fed president Narayana Kocherlakota, and Philadelphia Fed president Charles Plosser – were published at the end of the statement the FOMC published after its meeting.

Less clear was the commitment of the majority to push through the resistance. A counterweight of committee members supportive of looser monetary policy suggests Mr. Bernanke has the support to marshal further stimulus, if he decides economic conditions warrant it.

"The Federal Reserve has to do what it can to promote a stronger economic recovery," Sandra Pianalto, head of the Cleveland Fed and an alternate on the FOMC, said at an event in Akron, Ohio.

Policy makers pushed ahead with fresh stimulus last month after the Fed's staff economists cut their economic outlook for both the second half of 2011 and the "medium term." The Fed continues to expect economic growth, but at a rate so slow that the unemployment rate will remain elevated at the end of the 2013, according to the minutes, which were released by the Fed Wednesday in Washington.

The U.S. jobless rate was 9.1 per cent in September, well in excess of the 5.5-per-cent rate that Fed officials consider to be roughly equivalent with their mandate to achieve maximum employment. There were 3.1-million job openings in August, a 26-per-cent increase from the end of the recession in June, 2009, but far short of the 4.4-million openings recorded in December, 2007, when the downturn began, the Labor Department reported Wednesday.

"More easing manoeuvres are inevitable," Michael Gregory, an economist at BMO Nesbitt Burns in Toronto, said in an analysis of the latest Fed minutes.

The measures the Fed adopted last month amounted to a compromise between the two extremes on the policy committee.

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Known on Wall Street as a "twist," the Fed's latest unconventional policy should lower longer-term borrowing costs without requiring the central bank to add to holdings that already exceed $2-trillion, which represents considerably more financial risk than a conservative institution like the Fed would care to manage. (The FOMC also chose to reinvest the proceeds of its expiring housing assets back in the market for mortgage securities, rather than Treasuries.)

Policy makers reviewed a milder version of the twist that would have seen the Fed reinvest the profits from its asset portfolio in longer-term securities, rather than actively sell shorter-term debt to quickly alter the average maturity of its holdings. FOMC members also considered a third asset-purchase program, or quantitative easing, under which the Fed would create hundreds of billions of dollars to buy Treasuries.

With the benchmark interest rate near zero, the latter measure is the most potent policy left in the Fed's arsenal, and most officials appear to want to save it for an emergency.

"A number of participants saw large-scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted," the minutes said.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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