WASHINGTON – The Federal Reserve may be preparing to take further steps to stimulate an economy that remains too weak to reduce high unemployment.
Minutes of the Fed’s Oct. 23-24 policy meeting released Wednesday suggest that it might unveil a bond buying program in December to replace a program that expires at year’s end.
The bond purchases would be intended to lower long-term borrowing rates to encourage spending and strengthen the economy. The hope is that more hiring would follow.
Under an existing program, called “Operation Twist,” the Fed has been selling $45 billion a month in short-term Treasurys and using the proceeds to buy an equal amount of longer-term securities.
When Operation Twist ends after December, the Fed will run out of short-term investments to sell. The minutes show support among “a number of” Fed policymakers to replace Twist with another program of long-term bond purchases.
The minutes do note that “several” Fed policymakers questioned whether additional bond buying would be needed as long as the economy sustained its modest gains. And “a couple” worried that keeping rates too low for too long could drive up inflation.
But Paul Ashworth, chief U.S. economist at Capital Economics, said he thought the Fed minutes made clear that a new bond-purchase program would likely begin after the year ends.
A new bond-buying program would come on top of a program the Fed launched in September. It began buying $40 billion a month in mortgage bonds to try to reduce long-term rates and make home buying more affordable. It was its third round of bond purchases.
The Fed also said in September that it planned to keep its benchmark short-term rate near zero through mid-2015. And it signalled a readiness to take other stimulative steps if hiring didn’t pick up.
The Fed reaffirmed that stance at its October policy meeting but took no new action. Officials decided to wait to see whether the aggressive steps they announced in September would boost the economy.
In a statement after the October meeting, the Fed said that while the economy is improving moderately, job growth remained slow and the unemployment rate elevated. The rate is now 7.9 per cent.
Many analysts say the economy is growing in the current October-December quarter at a weak annual rate below 2 per cent — too slow to drive down unemployment. In part, that’s why the Fed will likely take further action at its final policy meeting of the year Dec. 11-12.
The minutes describe discussion at the October meeting about changing how the Fed provides guidance about future policy moves. The Fed is considering replacing its target of mid-2015 for any rate increase with language that would link future rate hikes to specific levels of unemployment.
For example, Chicago Federal Reserve Bank President Charles Evans has urged adopting a commitment to keeping rates ultra-low until unemployment falls below 7 per cent. Minneapolis Fed President Narayana Kocherlakota has suggested an even lower unemployment threshold of 5.5 per cent, as long as inflation remains under control.
Support for such numerical guidelines has gained a key backer in Fed Vice Chairman Janet Yellen. She said in a speech Tuesday that she was “strongly supportive” of the idea.
The minutes indicated that while Fed officials want to improve their public guidance on interest-rate policy, they remain divided over the best approach.
The current Operation Twist hasn’t expanded the Fed’s portfolio of bond holdings. It’s instead revamped the portfolio by shrinking the proportion made up of short-term investments and expanding the proportion made up of longer-term investments.
If the Fed launches a new bond-buying program, it would expand the portfolio.
Critics say the Fed’s continued pumping of money into the financial system is heightening the risk of high inflation. But Fed Chairman Ben Bernanke and his allies think the bigger risk would come from doing too little to boost a persistently sluggish economy.