Fed officials split over new stimulus action

Posted July 12, 2012, at 7:41 a.m.

WASHINGTON — Federal Reserve policymakers are split over whether to launch another big stimulus program.

While “almost all” of the policymakers agreed that unemployment remains elevated, Fed officials were divided in their assessment of whether and when the central bank should expand its efforts to spur growth with something like another round of major bond purchases, according to an account of the Fed’s June 19 to 20 meeting, released Wednesday.

Major stock indexes closed lower, as the account of the Fed’s deliberations seemed to deflate investors’ hopes for more imminent stimulus from the Fed.

“Although a few members were calling for more accommodation, there was no sign that they were rushing to pull the trigger,” said Steven Ricchiuto, chief economist at Mizuho Securities in a note to clients. “Moreover, the committee seems to be looking for alternative means to stimulate the economy, further reducing” the likelihood that the Fed will undertake a third round of major bond purchases.

At their June meeting, Fed officials voted to keep the central bank’s short-term interest rate near zero at least through late 2014, affirming a pledge they first made in January.

By a vote of 11 to 1, policymakers also decided last month to extend a modest stimulus program of selling short-term bonds and using the proceeds to buy longer-term securities — a program known as Operation Twist that is aimed at holding down long-term interest rates.

But the Fed’s latest meeting was before the release of the June jobs report last week, which showed a third straight month of subpar job growth. Analysts say the June employment data increases the odds that the central bank will launch new stimulus action. The Fed’s next policy-setting meeting is set for July 31 to Aug. 1.

In their June 19 to 20 meeting, Fed policymakers downgraded their projections for economic growth and employment. The jobless rate held at 8.2 percent in June after falling steadily since last summer.

The minutes of that meeting, released with the usual three-week lag, showed that Fed officials were increasingly worried about the eurozone debt crisis. They expressed concerns as well about the possibility of a sharp fiscal tightening in the U.S.

At the same time, the minutes indicate that Fed policymakers didn’t see eye to eye on the threshold for taking additional action.

“A few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth in employment and to ensure that the inflation rate would be at the committee’s goal,” the minutes said. But “several others” indicated that additional efforts could be warranted only if the economic recovery were to “lose momentum.” The minutes suggested that some Fed policymakers were concerned that the central bank’s easy-money policies posed inflationary risks down the road.

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