Fed minutes: 2 officials saw need for bolder steps

[October 13, 2011]  WASHINGTON (AP) -- Federal Reserve policymakers considered a third round of bond purchases at their last meeting, and at least two members said the weakening economy might require it.

Minutes of the Sept. 20-21 meeting released Wednesday also reflected the policymakers' uncertainty over why the economy is struggling to grow and create jobs more than two years after the recession has ended.

In the end, the Fed stopped short of expanding its portfolio of investments. Instead, it opted to shift $400 billion of its investments to try to lower long-term interest rates. That followed the Fed's announcement in August that it planned to keep short-term rates at record lows until at least mid-2013, assuming the economy remains weak.

Some members have favored taking bolder steps to boost growth because the unemployment rate has been stuck at about 9 percent. But others have argued that the central bank has done all it can and that further action could increase the risk of inflation.

Two officials, who were not named, were willing to go along with the Fed's September action because policymakers did not rule out taking further steps, according to the minutes. The further steps were not named.

However, the members discussed more bond buying at the meeting, and some said that should remain an option.

"A number of participants saw large-scale asset purchases as potentially 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," according to the minutes.

In June, the Fed completed a $600 billion bond-buying program, its second round of large-scale Treasury purchases.

Supporters said the bond purchases kept rates low and encouraged spending. But critics charged that it weakened the dollar and stoked inflation risks.

Three members of the committee, all regional bank presidents, have dissented from the Fed's decisions at its past two meetings. That marked the highest level of dissent at the Fed in nearly 20 years.

Part of the trouble facing the Fed is that policymakers seem perplexed by what's kept the economy from rebounding from the recession that officially ended in June 2009.

"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, contributing to greater uncertainty about the economic outlook," according to the minutes.

Chairman Ben Bernanke told Congress last week that economic recovery "is close to faltering." He said the Fed is prepared to take further steps to support it.

Private economists say the central bank would likely take further action, including another round of bond buying, if the economy doesn't improve.

The Fed could also reduce the 0.25 percent interest the Fed pays banks on their excess reserves. The thinking is that cutting that rate would reduce the incentive for banks to keep their money at the Fed. So they might lend more.

Some said the next move could occur as soon as the Nov. 1-2 meeting. But other economists suggested the Fed may want to wait to give its recent efforts more time to have an impact.

"In our view, more easing maneuvers are inevitable," said Michael Gregory, senior economist at BMO Capital Markets.

In September, employers added 103,000 net jobs. While that was enough to ease recession fears, it's well below what's needed to lower the unemployment rate, which stayed at 9.1 percent for the third straight month. It takes about 125,000 jobs a month just to keep up with population growth.

Without more jobs and higher pay increases, consumers are likely to keep spending cautiously. Many have already cut back on spending in the face of steeper food and gas prices. Consumer spending accounts for 70 percent of economic activity.

Lower interest rates could help in a number of ways. Homeowners could refinance their mortgages at lower rates, leaving them more money to spend or pay down debt. Businesses could expand or invest at lower costs, allowing some to hire more workers.

But economists doubt the Fed's latest move will do much because interest rates are already at historic lows. Last week, Freddie Mac said the average rate on the 30-year mortgage fell below 4 percent for the first time ever, to 3.94 percent.

[Associated Press; By MARTIN CRUTSINGER]

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