WASHINGTON – Federal Reserve officials signalled Wednesday that they may be ready to launch a new bond buying program when they next meet in September.
The goal would be to try to lower long-term interest rates to encourage more borrowing and spending.
Minutes of their July 31-Aug. 1 policy meeting released Wednesday don’t explicitly say what action the Fed would most likely take. But they hint that the central bank is preparing to begin more bond buying.
The minutes show that Fed officials spoke at the meeting with increased urgency about the need to provide more help for the still-weak U.S. economy. Many felt further support would be needed “fairly soon” unless the economy improved significantly.
The Fed has already sought to drive down long-term rates by buying more than $2 trillion in Treasury bonds and mortgage-backed securities in two previous rounds of bond purchases. The purchases are called “quantitative easing.”
Based on the minutes, David Jones, chief economist at DMJ Advisors, said he thought the likelihood of further quantitative easing had risen from evenly split to as high as a 70 per cent chance that the Fed will make that move when it meets Sept. 12-13.
“I believe the Fed is signalling in very clear terms that a third round of bond purchases will be approved at the September meeting,” Jones said.
In the minutes, the Fed noted, “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.”
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Paul Ashworth, chief U.S. economist at Capital Economics, said that wording signalled that the Fed won’t be satisfied by the modest improvements the economy has made recently.
“Quantitative easing is still very much on the table,” Ashworth said.
The minutes also show many officials favour pushing the timetable for any increase in record-low short-term rates beyond the Fed’s current target of late 2014 at the earliest. Some economists think the target will be extended to mid-2015.
Reaction to the minutes in the stock and bond markets was positive but muted. The Standard & Poor’s 500 stock index, down most of the day, finished essentially flat. The price of gold, which traders sometimes buy as a hedge against inflation, jumped about $10 an ounce, to $1,650, its highest point since early May.
The Fed releases minutes of its private discussions three weeks after each meeting. After it meets in September, Fed policymakers will also update their economic forecasts, and Chairman Ben Bernanke will hold a news conference.
Ashworth and some other economists said the minutes suggested that if the Fed does launch a new bond buying program, it won’t set a target amount, as it has in the past. Rather, the Fed could keep a new program open-ended so it could continue to buy bonds until it saw a significant decline in the unemployment rate, now at 8.3 per cent.
An open-ended bond-buying program would represent a major shift in Fed policy, said Michael Gapen, an economist at Barclays.
Even if the Fed announces another round of bond purchases, some economists have questioned how much it might help. They note that mortgage rates and other key borrowing rates are already near record lows.
After its August meeting, the Fed announced no changes in its policies. But in a statement afterward, it appeared to signal a growing willingness to take further steps to boost the economy if it doesn’t improve. The Fed noted that growth had slowed in the first half of the year. In particular, it pointed to lacklustre job growth and consumer spending.
The issue of whether the Fed will announce any major moves in September was thrown into some doubt by economic improvements since its last meeting. Gains have been made in such areas as hiring, housing and consumer spending.
Many analysts are looking to a speech by Bernanke on Aug. 31 at an annual Fed conference in Jackson Hole, Wyo., to provide more guidance on any new actions.
In the view of some analysts, the Fed might still want to put off any major new bond-purchase program so it would have something in reserve in case the economy goes off a “fiscal cliff” at the end of the year. That’s when tax increases and deep spending cuts will take effect unless Congress reaches a budget agreement.
On Wednesday, the Congressional Budget Office warned that if Congress fails to act, the fiscal cliff, if it remained unresolved all year, would probably tip the U.S. economy into a recession in 2013. The CBO estimated that the economy would shrink 0.5 per cent in 2013. Unemployment would rise to around 9 per cent by late next year as a result of the spending cuts and tax increases, the CBO said.
The Fed remains divided over the need for further policy action. In a speech this week, Dennis Lockhart, president of the Atlanta regional Fed bank and a voting member of the Fed’s policy committee, said, “there was a risk to monetary policy being employed too aggressively and without effect.”
Still, the minutes seemed to indicate that those arguing for more support outnumber those arguing that the Fed has done enough.
The economy grew at a lacklustre annual rate of 1.5 per cent in the July-September – even slower than the 2 per cent growth rate turned in from January through March. Many economists think growth in the second half of this year will remain around 2 per cent, much too low to lower the unemployment rate.
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