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The US Federal Reserve considered a new round of quantitative easing as an option at its September monetary policy meeting, suggesting that “QE3” is still possible if the economy weakens further.
“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,” say minutes of the meeting, released on Wednesday.
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At the September meeting the Fed launched “Operation Twist” – a $400bn programme of selling short-dated and buying longer-dated Treasuries – in an effort to drive down long-term interest rates and support a failing economic recovery.
But the minutes suggest there is still an appetite on the rate-setting Federal Open Market Committee for more measures to support growth. While three of the 10 FOMC members voted against Twist, the minutes reveal that two other members thought that the outlook supported stronger action, and voted for Twist only because “it did not rule out additional steps at future meetings”.
The minutes also show that the FOMC is debating extensive changes to its communication policies. “Most participants indicated that they favoured taking steps to increase further the transparency of monetary policy, including providing more information about the committee’s longer-run policy objectives and about the factors that influence the committee’s policy decisions,” the minutes say.
That could mean setting an explicit inflation objective for the Fed, something long favoured by chairman Ben Bernanke, but held back by internal disagreements and the need for support in Congress.
The minutes also suggest that other options for the Fed include putting a number on its goal for unemployment, pledging to keep interest rates low until a specific economic target is met, providing more guidance on how it expects to change interest rates in future, and expanding its range of communication tools.
“Participants generally saw the committee’s post-meeting statements as not well suited to communicate fully the committee’s thinking about its objectives and its policy framework, and agreed that the committee would need to use other means to communicate that information or to supplement information in the statement,” say the minutes.
But the minutes also suggest that all of these changes remain controversial within the FOMC and will happen only slowly, if at all. “A number of participants” were concerned about the concept of an unemployment target.
The FOMC considered the option of cutting the interest rate that it pays on excess bank reserves but “many participants” thought that it risked unpredictable disruption to money markets and decided not to use it without better information on the likely effects.
The minutes showed that, once again, the Fed’s staff cut their economic forecast for the second half of 2011 and for medium-term growth, underlining the decision to launch further easing.