Some Fed members say more stimulus needed

A few Federal Reserve policy makers said the central bank will probably need to take further action to boost the labor market and meet its inflation target, according to minutes of their June meeting.

“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,” according to the record of the Federal Open Market Committee’s June 19-20 gathering released Wednesday (July 11) in Washington.

The minutes show two participants said additional bond purchases are appropriate, while two others said they would be warranted in the absence of “satisfactory progress” in cutting unemployment or if downside risks increase. FOMC members also said strains in global markets stemming from Europe’s debt crisis had increased since their April meeting, and that “U.S. fiscal policy would be more contractionary than anticipated.”

The committee last month extended through 2012 its Operation Twist program to lengthen the maturities of assets on its balance sheet in a bid to reduce long-term borrowing costs. Chairman Ben S. Bernanke said after the meeting that policy makers are prepared to “take additional steps” if the labor market fails to improve.

The minutes also show policy makers considering the risk that further easing might pose. Some members of the committee noted that excessive purchase of Treasuries could “at some point, lead to deterioration in the functioning of the Treasury securities market that could undermine the intended effects of the policy.”

Members agreed the risk of such a deterioration was “low at present” and would be outweighed by the benefits of extending the Operation Twist program.

In their discussion of policy, a few members said it would be “helpful to have a better understanding” of how large purchases would have to be to disrupt the Treasury market.

Participants at the meeting said financial conditions had become less supportive of the economy as investors’ concerns about the euro region’s sovereign-debt and banking crisis increased. Policy makers said that strains in Europe could spill over into the U.S. and “noted the importance of undertaking adequate preparations to address such spillovers if they were to occur.”

The FOMC met before a Labor Department report last week showing that companies hired 80,000 workers in June, fewer than forecast, and the unemployment rate held at 8.2 percent for a second month. Growth in private employment, which excludes government agencies, was the weakest in 10 months.

Policy makers in June also lowered their outlook for economic growth and employment. They said they expect the jobless rate to average 8 percent to 8.2% in the fourth quarter of this year. The rate has been stuck above 8% since February 2009.

The FOMC at the last meeting said it will extend Operation Twist by swapping $267 billion of shorter-term securities with the same amount of longer-term debt. The announcement extended the previous $400 billion program introduced in September. The Fed also repeated that its key interest rate was likely to stay near zero at least through late 2014.

Several Fed policy makers said the central bank should “explore the possibility of developing new tools to promote more accommodative financial conditions and thereby support a stronger economic recovery.”

Nearly all policy makers judged uncertainty about economic growth and unemployment to be higher than the normal level during the previous 20 years, the minutes show.

Fed officials continued their discussions of communications policies at the June meeting, and noted that the economic and interest rate forecasts they give to the public do not provide guidance “about how those diverse views come together” in the FOMC statement.

“Many participants indicated that if it were possible to construct a quantitative economic projection and associated path of appropriate policy that reflected the collective judgment of the Committee, such a projection could potentially be helpful,” the minute said.

Bernanke asked the communications subcommittee to “explore the feasibility” of developing a consensus forecast of the FOMC.

Since the June jobs report, San Francisco Fed President John Williams and the Chicago Fed’s Charles Evans said that the central bank could add additional stimulus through a third round of asset purchases, this time including housing debt.

“If further action is called for, the most effective tool would be additional purchases of longer-maturity securities, including agency mortgage-backed securities,” Williams said in a July 9 speech in Coeur D’Alene, Idaho. Evans said he would have favored the Fed taking stronger action in June.

Recent data have pointed to slowing growth. Manufacturing unexpectedly shrank in June for the first time since the economy emerged from a recession three years ago, according to a July 2 report from the Institute for Supply Management. A June 29 Commerce Department report showed that consumer spending stalled in May.

Prices rose 1.5% from a year earlier in May, as measured by the personal consumption expenditures price index. The inflation gauge is the lowest since January 2011 and has dropped from a 2011 peak of 2.9% in September.

Fed officials have identified the European debt crisis and the so-called fiscal cliff in the U.S. as risks to the economic outlook. More than $600 billion in higher taxes and spending cuts will take effect in 2013 unless Congress acts.

Stocks and Treasury yields have declined on signs of slowing global growth. The Standard & Poor’s 500 Index fell 2.4% from July 3 through yesterday, and the yield on the 10- year Treasury note slid to 1.50% from 1.63%.