Minutes from Fed meeting show growing support for action as US recovery remains weak ahead of November election
The Federal Reserve is prepared to act “fairly soon” unless the economy shows substantially stronger growth, according to minutes of the Fed’s last meeting.
With the US recovery still looking fragile, the Federal Open Market Committee (FOMC) minutes, released after the customary three-week lag, show growing support for action.
“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” according to the minutes.
At their previous meeting in June, only “a few members” thought further stimulus would likely be needed.
Bernanke may give more details when he speaks on 31 August. His speech at an economics summit in Jackson Hole, Wyoming, will come a week before the latest non-farm jobs report is issued, a statistic that has become a barometer of President Barack Obama’s political health in the 2012 election cycle.
The minutes follow on from the Fed’s statement at the start of the month when officials said the economy had “decelerated somewhat” over the first half of the year. In July the commerce department announced that US gross domestic product (GDP) – the broadest measure of an economy’s health – grew at 1.5% in the second quarter, down from 2% in the prior three months, and 4.1% in the fourth quarter of 2011.
Many economists predict that the Fed is likely to announce any action after its September meeting. With the economy still the central battleground of the election, Fed action is likely to trigger a political backlash. Republicans have already pressed Fed chairman Ben Bernanke to refrain from further action.
“The truth is the Federal Reserve cannot rescue Americans from the consequences of failed economic and regulatory policies passed by Congress and signed by the president,” said the House financial services committee chairman representative Spencer Bachus, told Bernanke last month at a congressional hearing.
The US economy appears to be in a tepid recovery with slowly improving jobs numbers and improvements in its devastated housing market. But since its June meeting, Fed officials noted, economic activity had slowed. Most policymakers agreed that “economic growth was likely to remain moderate over coming quarters and then pick up gradually” and that the unemployment rate would decline only slowly.
With interest rates still close to all time lows, Fed officials are likely to choose a third massive round of bond buying – known as quantitative easing – in order to stimulate the economy.
“Many participants expected that such a program could provide additional support for the economic recovery both by putting downward pressure on longer-term interest rates and by contributing to easier financial conditions more broadly,” the minutes stated.
Dissent remains, however, with some FOMC members questioning the “possible efficacy of such a program under present circumstances” and concerned about its impact on the Fed’s balance sheet.
The minutes came after the Congressional Budget Office said the US was facing a budget deficit of over $1tn for the fifth straight year. The CBO also warned, as has Bernanke, that political squabbling over so-called “fiscal cliff”, the expiration of year end tax breaks and imposition of draconian spending cuts, could push the economy back into a “significant recession” unless a resolution is found.
David Semmens, senior US economist at Standard Chartered, said the minutes “paint a picture of a committee more open to easing than the market was anticipating”. But he said the minutes were a snapshot and that economic data had improved since they were taken.