Fed Says Some Officials Were Open to Buying More MBS
Some Federal Reserve policy makers were open last month to boosting the central bank’s $1.25 trillion mortgage-backed securities purchase program to stimulate the economy amid concerns the recovery may fade.
“Some members thought that an increase in the maximum amount of the committee’s purchases of agency MBS could help to reduce economic slack more quickly,” according to minutes of the Federal Open Market Committee’s Sept. 22-23 meeting released today in Washington. One member said the improvement in the outlook could warrant a reduction in purchases, the minutes said, without identifying the policy maker.
Chairman Ben S. Bernanke said last week the Fed will be prepared to tighten credit when the economic outlook “has improved sufficiently.” Fed officials in last month’s meeting considered the risks of an anemic recovery with unused capacity leading to “subdued and potentially declining wage and price inflation.”
“Members discussed the importance of maintaining flexibility to expand the asset purchase programs should the economic outlook deteriorate or to scale back the programs should economic and financial conditions improve more than anticipated,” the minutes said.
The Standard & Poor’s 500 Index was up 1.4 percent to 1,088.10 at 2:10 p.m. in New York. Yields on two-year Treasury notes were unchanged at 0.9 percent.
Revised Up
Policy makers raised their economic projections based on improved housing markets, stabilizing consumer spending and a recovery in growth outside the U.S., the minutes said.
“Despite these positive factors, many participants noted that the economic recovery was likely to be quite restrained,” the minutes said. “Credit from banks remained difficult to obtain and costly for many borrowers; these conditions were expected to improve only gradually.”
Consumers were likely to be cautious in spending and businesses were likely to be careful in hiring and investing even if demand for products and services increased, the minutes said.
Vice Chairman Donald Kohn said yesterday inflation and growth will probably stay below the central bank’s objectives for some time, warranting low interest rates for an “extended period.”
Slowing Inflation
The risk of slowing inflation will exceed the chance of accelerating prices “for a while,” and there will be a gradual recovery that helps curtail joblessness, Kohn said in a speech to economists in St. Louis.
Policy makers are debating the timing for a withdrawal of the central bank’s record monetary stimulus, including an increase in the benchmark interest rate from close to zero.
Kansas City Fed President Thomas Hoenig said last week the central bank should start raising interest rates “sooner rather than later,” and Fed Governor Kevin Warsh said on Sept. 25 the Fed may need to tighten “with greater force than is customary.”
Fed officials unanimously decided at their Sept. 22-23 meeting to keep the benchmark interest rate near zero and repeated their pledge to keep rates low for an “extended period.” The Fed also committed to complete its $1.25 trillion in purchases of mortgage securities and extended the end-date of the program to March from December.
The U.S. economy probably expanded at a 3.2 percent annual pace in the three months ended Sept. 30, according to the median estimate in a Bloomberg News survey of 64 analysts earlier this month. That would mark the first quarter of growth after declines over four consecutive quarters.
Sales Fell
Economists predicted 2.4 percent growth in the fourth quarter and the same pace for all of 2010, the Bloomberg survey showed. Sales at U.S. retailers fell less than anticipated in September. The 1.5 decrease in purchases followed a 2.2 percent gain the prior month, figures from the Commerce Department showed today in Washington.
Economists forecast the unemployment rate to peak at 10.1 percent in the first quarter. The jobless rate will average 9.9 percent through next year and decline to 9.1 percent in 2011, according to the median estimates from the Bloomberg survey.
In a departure from previous releases of meeting minutes, the Fed released numbers of a staff economic projection, instead of only describing the direction of the forecast.
“The staff still projected only a slow improvement in labor markets, with the unemployment rate moving down to about 9.25 percent by the end of 2010 and then falling to about 8 percent by the end of 2011,” the minutes said.
Jobs Cut
Employers cut 263,000 jobs in September after a 201,000 drop in August, while unemployment climbed to 9.8 percent, the highest level since 1983. The U.S. has lost 7.2 million jobs since the recession started.
The core consumer-price index, which excludes food and energy, rose 1.4 percent in August from a year earlier, down from a 2.5 percent increase in September 2008.
The volume of delinquent commercial mortgages jumped sevenfold last month, Credit Suisse Group AG analysts said in a report Oct. 9. Data from Moody’s Investors Service show prices have plummeted 38.7 percent from October 2007 peaks.
U.S. consumer credit in August fell for a seventh straight month as banks maintained restrictive terms and households were reluctant to borrow.