July 12, 2012
The US Federal Reserve is open to the possibility of buying more bonds to stimulate the economy, but the recovery might need to weaken for a consensus to build, minutes from the central bank's June meeting released on Wednesday showed.
The Fed last month expanded its latest effort to keep long-term rates low, announcing it would buy an additional $US267 billion in long-term bonds with proceeds from short-term notes.
Even given that modest step, many economists expect the US central bank to ease monetary policy further by eventually launching a third round of outright bond purchases that would increase the size of the central bank's $US2.9 trillion balance sheet.
The minutes of the June 19-20 meeting showed a few officials on the policy-setting Federal Open Market Committee thought recent softness in the economy was sufficient to justify bolder action. But the report suggested a majority was not yet on board - at least not before last week's employment report, which showed a paltry 80,000 new jobs were created in June.
"Several (members) noted that additional policy action could be warranted if the economic recovery were to lose momentum, if the downside risks to the forecast became sufficiently pronounced, or if inflation seemed likely to run persistently below the committee's longer-run objective" of 2 percent, the minutes said.
US stocks extended losses on the report, which failed to give investors the sort of assurances about further quantitative easing, or QE, that some had been hoping for.
"We really don't see any clear indication in these minutes that the Fed is any closer to QE3 than at their previous meeting," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "Very cautious on the economic outlook and the door remains open to QE3 but nothing imminent in these minutes."
The US economy grew just 1.9 percent in the first quarter, and many economists expect the recovery slowed further over the past three months.
Employment growth dropped to an average of just 75,000 per month in the second quarter from 226,000 in the first three months of the year. By a loose rule of thumb, the economy would need to add about 125,000 jobs per month to bring down the unemployment rate, which stuck at 8.2 percent in June.
Forecasts released after the meeting last month showed the Fed had sharply downgraded its projections for economic growth. It now sees the economy expanding between 1.9 percent and 2.4 percent this year, a big change from April's forecast range of 2.4 percent to 2.9 percent.
Some policymakers appeared worried that further bond buying could somehow hurt the market for US Treasury bonds.
"Some members noted the risk that continued purchases of longer-term Treasury securities could, at some point, lead to deterioration in the functioning of the Treasury securities market that could undermine the intended effects of the policy," the minutes said.
"However, members generally agreed that such risks seemed low at present, and were outweighed by the expected benefits of the action," the report added.
The minutes showed that Fed staff, like the policymakers themselves, cut their GDP forecasts in June and suggested they believed the economy would make little headway in reducing unemployment until 2014.