Fed meeting minutes hint at more quantitative easing
A NEW round of asset purchases by the US Federal Reserve could be in prospect after the minutes of its June meeting showed a number of officials ready to take action if the economy gets any weaker.
The minutes, which show that some officials on the rate-setting Federal Open Market Committee were already looking past the limited easing they announced in June, may lead markets to cut the odds on a third round of quantitative easing, or QE3.
A “few” of the 12 voting members already thought that “further policy stimulus likely would be necessary”, while “several others” said it might be needed if the economy loses momentum, risks to growth get worse or inflation looks set to remain below target.
Committee members also said strains in global markets stemming from Europe’s debt crisis had increased since their April meeting, and that “US fiscal policy would be more contractionary than anticipated”.
The language of the minutes suggests that further Fed action still depends on economic data in the coming weeks but there is a strong bias on the committee towards doing more if necessary.
Equities fell back and the US dollar rose slightly in response to the lack of action. The US economy has lost momentum through the spring with a run of disappointing data. The US added only 80,000 jobs in June, a pace too slow to keep up with population growth. The poor data led Fed staff to revise down their forecasts, reflecting a “slower pace of private-sector job gains, more-subdued retail sales, a lower trajectory for personal income, greater restraint in government purchases, and weaker net exports”.
That persuaded the Fed to extend “Operation Twist” – its programme of selling short-term securities and buying those with longer to run until maturity – at its June meeting. “Members generally judged that continuing the maturity extension programme would put some downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” said the minutes.
In an indication that the most likely next step is QE3 – in which the Fed would make outright purchases of assets such as long-term treasury bonds – some officials asked how big the Fed’s balance sheet could grow before securities markets seized up. With short-term interest rates already at zero, both Operation Twist and quantitative easing aim to drive down long-term interest rates by reducing the supply of bonds left for private investors, but QE involves outright asset purchases.
However, the minutes also show a committee hungry for alternatives to an ever expanding balance sheet. Several officials wanted to develop “new tools to promote more accommodative financial conditions”. – (Copyright The Financial Times Limited 2012/Reuters)