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At meeting Fed discussed using more stimulus

Federal Reserve officials signaled at their August meeting that they would consider going beyond a modest program to purchase government debt if necessary to boost the economy.
/ Source: The Associated Press

Federal Reserve officials signaled at their August meeting that they would consider going beyond a modest program to purchase government debt if necessary to boost the economy.

Minutes of the Fed's discussions from the Aug. 10 meeting show the central bank recognized that the economy could need further stimulus beyond the debt purchases. Those are intended to lower interest rates on a range of consumer and business loans.

The minutes, which were released Tuesday, did not spell out what new steps might be taken. But they do indicate that the officials focused attention on the modest move the Fed did take at the meeting, which would invest a small amount of proceeds from its huge mortgage bond portfolio in Treasury securities.

Some Fed officials argued that reinvesting proceeds from the Fed's holdings of mortgage securities "could send an inappropriate signal to investors about the committee's readiness to resume large-scale asset purchases," the minutes said.

One member objected and said making the change could complicate the Fed's eventual exit from its period of aggressive credit easing, which began more than two years ago as the country plunged into a deep recession.

The minutes are not verbatim and do not identify speakers but analysts said they provided an indication that the central bank engaged in an extensive debate over the issue before agreeing to provide nearly unanimous support for Federal Reserve Chairman Ben Bernanke.

In the end, the Federal Open Market Committee, the panel of Fed board members and regional bank presidents who set interest rates, voted 9-1 to support the modest easing move. The only dissent came from Kansas City Federal Reserve Bank President Thomas Hoenig.

Fed policymakers took the step at a time when economic growth is slowing and many are concerned the country could slip back into a recession.

After the recession began in December 2007, the Fed tripled its balance sheet to help bolster economic growth and steady the housing market. In addition to buying Treasury debt, it purchased $1.25 trillion in mortgage-backed securities.

For most of this year the central bank had discussed exiting the program. But at the August Fed meeting, the central bank said it would use the proceeds from the mortgage program to purchase Treasury bonds. The goal would be to keep its total holdings of securities at around $2.05 trillion.

The minutes said that the committee believed that the most likely outcome for the economy was that it would continue to grow and would avoid a destabilizing bout of deflation — when prices and wages decline.

But the panel said it was prepared to go further to guard against either a return to recession or deflation.

The minutes said the Fed panel agreed it would "need to consider steps it could take to provide additional policy stimulus tools if the outlook were to weaken appreciably further."

Mark Zandi, chief economist at Moody's Analytics, said it was significant that the minutes showed Fed officials were willing to consider various steps to bolster growth.

Zandi said the Fed could begin significantly expanding its balance sheet by buying large amounts of Treasury securities if the unemployment rate begins to rise on a sustained basis. The jobless rate stood at 9.5 percent in July with the government scheduled to release the August report on Friday.

However, other economists said they did not believe the central bank was close to resuming a large-scale effort to buy securities. They predicted that the central bank will keep its target for overnight bank loans at zero to 0.25 percent, where it has been since December 2008. But it will not launch other major credit easing efforts unless the economy weakens significantly.

"The Fed doesn't believe we will have a double-dip recession. But if there is a significant deterioration in the economy, then all bets are off and they will act more aggressively," said David Jones, head of DMJ Advisors, a Denver-based economic consulting firm.

The minutes showed the discussions on Aug. 10 lasted for more than five hours. Many analysts said the amount of time spent on a relatively modest change showed the central bank is not close to approving a large-scale operation.

"The Fed will only restart its asset purchases if economic conditions deteriorate markedly from where we are now," said Paul Ashworth, an economist at Capital Economics.

Bernanke discussed a range of options that could be employed at a Fed conference Friday in Wyoming including resumption of large-scale purchases of Treasury securities.

In that speech, Bernanke said he believed that the economy would continue to grow modestly in the second half of this year and then rebound to stronger growth in 2011.