Fed minutes show active discussion of QE3

Member of the Federal Reserve are getting closer to going forward with another round of bond purchases, according to minutes released Wednesday from the most recent meeting. The minutes showed the central bank worried about signs of decelerating growth and are itching to take action.

By Steve Goldstein
Aug. 22, 2012, 2:10 p.m. EDT
Market Watch

WASHINGTON (MarketWatch) — Members of the Federal Reserve got closer to pushing the button on a new round of bond purchases even as a less-aggressive step of altering language on a low-rate pledge seems to be in the works, according to minutes from the most recent meeting released Wednesday.

The minutes of the July 31-Aug. 1 meeting of the central bank’s Federal Open Market Committee showed a central bank worried about signs of decelerating growth — and itching to take action.

“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,” the minutes said.

The release of the minutes triggered an immediate move in markets. Stocks SPX -0.20% pared their losses and the dollar EURUSD +0.43% weakened against the euro.

While an aggressive statement, it’s not clear whether a spate of economic releases since that meeting — showing a 163,000 expansion in nonfarm payrolls in July and a pickup in retail sales, among other statistics — has changed anyone’s mind.

The president of the Atlanta Fed, Dennis Lockhart, said Tuesday there was a risk in using monetary policy “too aggressively” to counter problems that need to be fixed on a fiscal level. Lockhart is considered to be a swing voter between the doves pushing more action and the hawks wanting the Fed to step off the gas.

The minutes released Wednesday show a clear discussion of what could be done. The first alternative listed is essentially what the markets anticipated for the Aug. 1 meeting — a change in the date over which the central bank expected to keep its target range for the federal funds rate between 0% and 0.25%, perhaps in conjunction with a statement saying a “highly accommodative stance” was likely to be maintained even as the recovery progressed. The current Fed pledge is to keep rates at “exceptionally low levels” through at least late 2014.

The second idea tossed around is what’s commonly called “QE3” — or in the words of the minutes, “a new large-scale asset purchase program.” According to the minutes, “many” said such a program could provide additional support for the economy by putting downward pressure on long-term interest rates and making financial conditions more broadly easier.

They discussed whether a new program should snap up more Treasury bonds or buying mortgage-backed securities issued by the likes of Fannie Mae and Freddie Mac. While some fretted about the impact on trading conditions from such purchases, “others” agreed with Fed staff that markets would not be disrupted even with substantial buys. There also were worries from “several” members that more bond buys could disrupt any exit from accommodation.

Fed members including Chairman Ben Bernanke and Vice Chairman Janet Yellen also discussed ideas like reducing the interest rate paid on reserves — for now, the central bank seems content to examine a similar move made by the European Central Bank — and whether to replicate a bank lending program initiated by the Bank of England called “funding for lending.”

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