The Federal Open Market Committee voted at the end of a two-day meeting in September to begin a new effort to reduce long-term interest rates, allowing businesses and consumers to borrow more cheaply.
The Fed disclosed at the time that three members of the 10-person board had voted against the decision. The minutes released Wednesday record that on the other side, two members wanted the Fed to take even stronger action.
The internal divisions were partly the product of a lack of clarity about the health of the economy. In its predictions since the end of the recession, the Fed has repeatedly overestimated the pace of economic growth, and the minutes report that the board does not understand why it has been wrong.
“It was again noted that the cyclical impetus to economic expansion appeared to be weaker than in past recoveries, but that the reasons for the weakness were unclear,” the minutes said.
The Fed announced in August that it intended to maintain short-term interest rates near zero for at least two more years. In September, it announced an effort to further reduce long-term interest rates by moving $400 billion from investments in short-term Treasury securities to longer-term Treasury securities. Both policies aim to cut borrowing costs for businesses and consumers.
The Fed’s chairman, Ben S. Bernanke, has made clear that the central bank is willing to keep trying to bolster the economy if necessary, but also that there will be a high bar for further action. In particular, he has said that the Fed is most likely to act if the pace of inflation abates to the point where there is a risk of declining prices and wages. Such deflation would damage growth.
The minutes, which are normally released three weeks after a policy decision, made clear that the Fed had not changed its view that the pace of inflation was likely to remain at roughly 2 percent a year, the rate that the Fed considers most healthy.
“Participants generally judged that there was relatively little risk of deflation,” the minutes said.
In the absence of any fear of deflation, the minutes suggested that the Fed was unlikely to seriously consider another round of asset purchases, the most powerful arrow left in its quiver.
The minutes do note, however, that “a number of participants” said that they regarded such a plan as “a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted.”
The minutes do not disclose the names of the two members who favored stronger action, although one obvious candidate is Charles L. Evans, president of the Federal Reserve Bank of Chicago, who has argued publicly that the Fed should move more aggressively to stimulate the flagging economy.
The names of the three dissenters, however, are public: Richard W. Fisher, president of the Federal Reserve Bank of Dallas; Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis; and Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia. They argued that the Fed’s actions were unlikely to help the economy and would increase the chances of a faster pace of inflation.
The committee next meets on Nov. 1 and 2.
Article source: http://feeds.nytimes.com/click.phdo?i=cd4336a7f4cf5bc36d0617c4bc782faa
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