Policy: Economy

Minutes show conflict about Fed’s plans for stimulus

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Federal Budget,PennAve,Joseph Lawler,Economy,Federal Reserve,Ben Bernanke

Federal Reserve officials warned chairman Ben Bernanke before his June 19th press conference that his comments would spook markets, minutes from the Fed’s latest meeting released Wednesday show.

The minutes state that some members of the Fed thought that Bernanke’s plan to clarify the timeline for eventually slowing down the Fed’s $85 billion a month in Treasuries and mortgage-backed securities “might be misinterpreted as signaling an end to the addition” of stimulus “or even be seen as the initial step toward exit.”

Bernanke stressed on multiple occasions during his June 19th press event that Fed’s plans to taper the bond-buying program were conditional on the economy improving as planned – another point that the minutes show other Fed officials were careful to emphasize. Nevertheless, investors and traders either didn’t understand or didn’t believe Bernanke’s comments. In the wake of his press conference stock markets fell, the interest rate on 10-year Treasuries shot up to a near two-year high, and mortgage rates spiked as markets built in the expectation that the Fed would stop buying assets as soon as September.

In the week-plus following the conference, a succession of other Fed regional bank presidents and members of the board of governors tried to reinforce the message that the Fed wasn’t set on “tapering” or slowing down its stimulus purchases at its next meeting, contrary to the expectations set by Bernanke. Nevertheless, following last week’s strong jobs report the Wall Street banks J.P. Morgan and Goldman Sachs noted that they were anticipating a September taper, a clear sign that the Fed members’ fears have been realized and that Bernanke’s June 19th statements were taken as an initial step toward exit.

The minutes show that the Fed sees the economy improving slowly and steadily, but that members of its monetary policy team don’t want to start tapering until the labor market shows clear improvement. The minutes also show one member preferring that inflation start rising toward the Fed’s preferred 2 percent rate. According to the Fed’s favorite inflation measure, core inflation was nearly 1 percentage point below that goal in June, at 1.05 percent — the lowest ever recorded. That member is almost certainly St. Louis Fed president James Bullard, who ultimately dissented from the Fed’s June 19th decision on the basis that it didn’t signal strongly enough that the Fed would reverse falling inflation.

Some Fed officials at the meeting were surprised that the $80 billion federal budget sequestration that went into effect in March hadn’t restrained growth further. One, however, worried that federal government furloughs set to being in the second half of 2013 would begin to bite into economic growth.

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