Minutes show Fed wary on economy
PROVIDED BY MarketWatch - 2:21 PM 05/16/2012
WASHINGTON (MarketWatch) -- Federal Reserve officials weren't confident in recent indicators to upgrade their description of the economy as "several" say more easing could be needed if momentum slows, according to minutes released by the central bank Wednesday.
Federal Reserve officials said they wanted to be more confident that there had been a significant upturn in the economic outlook before making changes to the central bank's guidance that rates will stay low until late 2014, according to a summary of the April 24-25 meeting. Interest rates have been held at near-zero levels since December 2008.
Fed officials noted that the labor market had improved but were not certain about the cause of the improvement.
Some thought that the warm weather in the beginning of the year could be a factor, while others noted that the labor market started strong out of the gate in 2010 and 2011 only to fade as the year progressed.
For those reasons, Fed officials "preferred adjusting the forward guidance only once they were more confident that the medium term economic outlook or risks to the outlook had changed significantly," according to the minutes.
Another factor in maintaining the current guidance, supporters said, was that the Fed was limited in responding to any renewed downturn with the Fed's favorite interest rate tool, the federal funds rate, so close to zero.
Markets are watching the Fed minutes closely for hints of whether the central bank will engineer another round of asset purchases, or quantitative easing.
At the moment, most economists don't think the central bank is eager to buy more assets. After the purchases of over $2 trillion in Treasury and housing-related assets, they wonder if more will do any good. The Fed's Operation Twist program, in which the central bank is selling $400 billion of short-term securities and reinvesting them in longer-term Treasurys, is due to expire at the end of June.
On the other hand, it is popular belief on Wall Street that the Fed would rather buy more assets now than wait until closer to the presidential election.
The minutes did not contain a lengthy discussion of quantitative easing, saying only that "several members" expressed support for QE, "if the economic recovery lost momentum or the downside risks to the forecast became great enough."
At the prior meeting in April, "a couple of members" supported more easing.
Treasurys rose after the minutes were released, indicating the bond market perceived a greater chance of the Fed buying debt.
"The lowering of the threshold for more stimulus and the cautious optimism towards the sustainability of the economic recovery suggests that the burden of proof remains on the recovery to prove the need for less stimulus," said Millan Mulraine, senior U.S. strategist at TD Securities in New York.
The Fed also announced that it has decided to exclusively hold two-day FOMC meetings, as opposed to the previous mix of one- and two-day sessions.
And the Fed altered the timing of Federal Reserve Chairman Ben Bernanke's press conferences so that they will occur once per quarter.
Under the prior schedule, there was a lengthy break between scheduled press conferences in June and November.
The minutes show that Bernanke took some steps to try to try to find a way to reconcile the Fed's late-2014 guidance with the individual forecasts of the FOMC members.
Fed officials appear to expect higher rates than the guidance suggests. Analysts note that a third of the FOMC expects rate hikes to begin either this year or next.
Bernanke asked a FOMC subcommittee on communications to review the issue.
Fed officials also reviewed the possibility of releasing forecasts based on alternative economic scenarios.
No decision was taken at the meeting on this approach. Some Fed officials have said the exercise might be useful for internal deliberations.
