Minutes from the latest Federal Open Market Committee meeting show policymakers split on what type of accommodative monetary tools the central bank should use to try and kick-start the economy. The FOMC explored three options: an extension of its reinvestment program of maturing agency securities into long-term securities; a program to purchase long-term Treasury securities and sell the same amount in short-term securities; and the purchase of longer-term Treasury securities, which would increase the Fed’s balance sheet and supply of reserve balances. The members decided to implement a stimulative policy to buy $400 billion of Treasury bonds to lower long-term borrowing costs. The bond-buying program, which began Oct. 3, was dubbed Operation Twist in homage to a similar Federal Reserve program from the 1960s. FOMC members hold varying viewpoints on which policy tools will work, and there are strong hold-outs when it comes to the issue of more quantitative easing. “Many (committee members) judged that these policies could provide additional monetary policy accommodation by lowering longer-term interest rates and easing financial conditions a time when further reductions in the federal funds rate are infeasible.” Three policymakers voted against the committee’s decision because they “did not support additional policy accommodation at this time.” Richard Fisher, president of the Federal Reserve Bank of Dallas, Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis and Charles Plosser, president of the Federal Reserve Bank of Philadelphia, dissented. But other members held a contrary view. “A number saw the potential effects on real economic activity as limited or only transitory, particularly in the current environment of balance sheet deleveraging, credit constraints, and household and business uncertainty about the economic outlook,” according to the minutes. Some participants said a maturity extension program will function without expanding the Fed’s balance sheet or level of reserve balances. Others see large-scale asset buys as “a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery is warranted.” Several FOMC members said large-scale asset purchases would expand the Fed’s balance sheet, raising the likelihood of inflation or heightening inflationary expectations. These members believe large asset purchases should be reserved for instances when there is a high risk of deflation. Paul Dales, senior U.S. economist at Toronto-based Capital Economics, said the FOMC minutes suggest the Fed may follow Operation Twist with some additional small measures to support the economy. “However, it intends to hold QE3 in reserve just in case things get much worse, meaning another recession, severe strains in the financial markets (perhaps linked to the European crisis) and a renewed threat of deflation,” according to Dales. “That means QE3 is probably a story for next year, not this year.” Write to Kerri Panchuk.
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