Minutes Show Fed Leaning Toward New Stimulus

Minutes released by the Fed on Tuesday revealed some of the division among officials over the need for more stimulus.

WASHINGTON — A critical mass of officials at the Federal Reserve appear to favor taking new actions to reinvigorate the lagging recovery in the absence of clear signs of improvement in the economy, according to minutes of the central bank’s last policy meeting.

Minutes released Tuesday of the Sept. 21 meeting of the Federal Open Market Committee, which sets monetary policy, confirmed that a considerable number of officials now “consider it appropriate to take action soon,” given persistently high unemployment and uncomfortably low inflation.

But other Fed officials “saw merit in accumulating further information before reaching a decision,” according to the minutes of the Sept. 21 meeting, which lasted 5 hours and 10 minutes, longer than usual — a sign of the complexity of one of the hardest choices the Fed has faced since the recession began.

Over all, the minutes reaffirmed the “considerable uncertainty” about the outlook for the economy that Fed officials have expressed in recent speeches, many of them since the September meeting.

In essence, the debate is between those who believed the Fed should act “unless the pace of economic recovery strengthened,” and those who thought action was merited “only if the outlook worsened and the odds of deflation increased materially.”

The Fed lowered short-term interest rates to nearly zero in December 2008, and then bought $1.7 trillion in mortgage-backed debt and Treasury securities in an effort to lower long-term rates, a process that ended in March.

Now, with unemployment hovering just below 10 percent and with inflation well below the Fed’s unofficial target of nearly 2 percent, the Fed is considering renewed intervention: creating money to buy long-term Treasury debt. That would put additional downward pressure on long-term rates, making credit even cheaper.

Former Fed officials interviewed Tuesday appeared as divided as the current ones.

“If you lead the horse to water and it won’t drink, just keep adding water and maybe even spike it,” said Robert D. McTeer Jr., a former president of the Federal Reserve Bank of Dallas, and a well-known “dove” on inflation. “You definitely don’t want to take the water away.”

Mr. McTeer said the markets had made too big a deal of the prospect of additional asset purchases. The Fed should pursue the strategy in a gradual and incremental fashion, rather than making it appear to be such a significant decision, he said.

“From the outside it might look like they’re dithering,” he said. “Maybe they are, maybe they’re not. They haven’t done a very good job at communicating.”

H. Robert Heller, a former Fed governor, had the opposite view.

“I would do nothing,” he said, expressing anxiety that the Fed might appear to be “monetizing the debt,” or printing money to make it easier for the government to borrow and spend.

“If they start to monetize the federal debt, they will dig themselves a much deeper hole later on,” he said. “That’s what we learned from the 1970s, when the Fed undertook a very expansionary monetary policy. It took a double recession in the early 1980s to wring inflation out of the economy. We don’t want to repeat that.”

The minutes suggested that Fed officials were fairly unified in some views of the economic outlook. The consensus is that the economy is unlikely to enter another recession but that growth “could be slow for some time.” Most also thought that the recovery would pick up gradually next year.

But that shared assessment did not result in a unified view on whether the Fed should act.

A few Fed officials noted that recoveries trigged by financial crises, like this one, have historically been uneven and slow. But others worried that “the sluggish pace of growth and continued high levels of slack left the economy exposed to potential negative shocks.”

Similarly, some Fed officials have argued that the high unemployment rate might have structural causes: mismatches between the jobs that are available and the skills needed to perform them; an inability of workers to move because their mortgages are greater than the value of their homes; and the effects of extended unemployment benefits.

Other Fed officials argued vigorously against that view, saying that “the current unemployment rate was considerably above levels that could be explained by structural factors alone.” Employment has fallen across a range of industries, job vacancies are low, and demand for goods and services is weak, these officials pointed out.

In general, inflation expectations — which can be critical in influencing price movements — have remained fairly stable, despite recent signs that they are rising. One strategy debated by the Fed was to shape these expectations by being more specific about its desired inflation rate, aiming at a price level rather than an inflation rate, or aiming at a path for the level of gross domestic product, the broadest measure of economic output.

“As a general matter, participants felt that any needed policy accommodation would be most effective if enacted within a framework that was clearly communicated to the public,” the minutes noted.

That communication is expected to continue later this week, when the Fed’s chairman, Ben S. Bernanke, gives a speech Friday at a conference in Boston on how monetary policy should be conducted in a low-inflation environment.

The speech will be Mr. Bernanke’s first major address since August, when he said in a speech at a Kansas City Fed symposium in Jackson Hole, Wyo., that the Fed was open to additional action if warranted.


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