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Further easing remains on Fed's policy table

U.S. Fed chairman Ben Bernanke

Alex Wong/Getty Images

Members of the U.S. Federal Reserve's policy committee are pushing for new stimulus measures, increasing the odds of further action by the central bank to support the faltering economic recovery, minutes of the committee's latest meeting show.

On Aug. 9, the Federal Open Market Committee said it expected to keep interest rates exceptionally low until the middle of 2013, an extraordinarily explicit guidance that prompted three of 10 voting members to dissent.

The opposition raised questions about the Fed's strategy. The protest represented the largest dissent since three voters broke with the consensus in November, 1992. Some economists said the opponents would impede any further attempt by chairman Ben Bernanke to stoke demand among businesses and consumers. The Fed has already slashed central bank interest rates to nearly zero and completed major bond purchases to keep market rates low.

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But the minutes show there are at least as many members on the policy committee that would have taken more aggressive action earlier this month.

"A few members felt that recent economic developments justified a more substantial move at this meeting," FOMC secretary Bill English said in his summary, released Tuesday on the Fed's website.

The Fed's leaders met with their outlook for the U.S. economy in tatters.

Fears that Europe would lose its grip on its debt crisis had flared anew, and the protracted debate over the debt ceiling, followed by the downgrade of the U.S. credit rating by Standard & Poor's, had taken a serious toll on consumer and business confidence. The committee's minutes showed that the Fed's staff economists had "notably" downgraded their forecast for economic growth this year and in 2012, and even had reduced their estimate of the U.S. "potential" growth rate – the pace the economy can advance without putting too much pressure on inflation.

While the Fed staff's view was that economic growth will rebound in the second half of the year, the increase "was projected to be sufficient to reduce the slack in the labour market only slowly, and the unemployment rate was expected to remain elevated at the end of 2012."

The Fed has a dual mandate to maintain price stability while achieving "maximum" employment, which policy makers loosely define as a jobless rate of about 5.5 per cent. The unemployment rate is currently 9.1 per cent.

Economic data released Tuesday only contributed to the pall hanging over the U.S. economy.

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Consumer confidence plunged to its lowest level in more than two years this month, according to the latest reading produced by the Conference Board. The New York-based research group said Tuesday that its index slumped to 44.5 from 59.2 in July, putting consumer sentiment at a level last seen during the recession. The number of respondents who told the Conference Board they expected the economy to deteriorate in the next six months jumped, outweighing an increase in the number of people planning a big-ticket purchase.

A separate report – the S&P/Case-Shiller index of property values in 20 U.S. cities – showed that home prices declined for a ninth consecutive month in July.

"Despite the internal opposition, easing remains on the Fed's policy table," Michael Gregory, senior economist at BMO Nesbitt Burns in Toronto, said in an analysis of the Fed minutes. "August is turning out to be a horrid month for U.S. economic data."

The one thing policy makers agreed on at their Aug. 9 meeting was to add an extra day to their Sept. 20 policy meeting, which Mr. Bernanke revealed in a speech at Jackson Hole, Wyo., on Friday.

An extended discussion is apparently necessary to decide what form further stimulus would take, should it be required.

The committee debated four policies on Aug. 9: the conditional commitment to keep rates low, a strategy that is aimed to encourage investment by removing the risk that borrowing costs will rise; a third asset-purchase program; selling securities with short-term maturities to buy longer dated assets; and cutting the rate the Fed pays on the deposits financial institutions leave at the central bank.

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No favourite emerged.

Creating money to buy bonds and other financial assets, which Wall Street calls quantitative easing, was favoured by "some" participants as a way to lower longer term interest rates, while "others" felt that could be done better by changing the mix of securities the Fed already holds. (Selling securities due to mature in the near term, and using the proceeds to buy debt that matures in five years or later could theoretically lower the cost of borrowing over the longer term and encourage investment.)

There were others who thought the Fed should tie its commitment to keep interest rates low to a more specific target – such as an acceptable level of unemployment, rather than a date on the calendar – to provide better clarity.

The debate will be continued over two days next month. If economic indicators continue to deteriorate, chances are policy makers will choose to implement one of those policies. The dissenters attract attention, but they are clearly in the minority.

"While all felt that monetary policy could not completely address the various strains on the economy, most members thought that it could contribute importantly to better outcomes in terms of the committee's dual mandate of maximum employment and price stability," the minutes said.

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