Federal Reserve split on whether more stimulus is needed

Federal Reserve officials are divided as to whether the central bank should consider further stimulus for the economy, even as they hash out how to exit from the recently concluded round of market-boosting activity.

Minutes released Tuesday of the June meeting of the Federal Open Market Committee show the Fed struggling with how to handle the lagging economic recovery. In addition, they reveal how the Fed expects to eventually raise rates while easing its holdings of Treasury bonds accumulated during its second round of “quantitative easing,” with the overall goal of unloading those securities over the next three to five years.

{mosads}According to the minutes, Fed officials were concerned about “disappointing” new employment data. The recent run of bleak jobs data was of “particular concern” to the FOMC, given that uncertainty about the nation’s job picture was seen as weighing heavily on the economy in such areas as consumer spending.

That data, coupled with other negative indicators such as investors becoming more risk-averse, led some on the committee to suggest the Fed might wish to consider additional monetary-policy stimulus if economic growth remains too slow to bring down unemployment.

Other members, however, said the growing risk of inflation suggests economic conditions could form that would push the Fed in the opposite direction — tightening monetary policy sooner than expected.

Following the meeting, the Fed downgraded its economic expectations, projecting slower economic growth and higher unemployment than it expected when the FOMC last met in April.

Fed Chairman Ben Bernanke said after the meeting that the Fed was not sure why the economy was growing slower than expected, but that some headwinds “may be stronger or more persistent than we thought.”

The FOMC minutes also provide the first details on how the Fed plans to exit from its near-zero interest rates and hundreds of billions of dollars in securities bought during QE2.      “”

Under that program, which wound to a close at the end of June, the Fed purchased roughly $600 billion of Treasury bonds in an effort to fight off deflation and boost the economy.

The minutes make clear that just because the Fed is discussing such moves, it does not mean they will be coming in the immediate future.

“Participants stressed that the committee’s discussions of this topic were undertaken as part of prudent planning and did not imply that a move toward such normalization would necessarily begin sometime soon,” the minutes state.

Under the plan — which was approved by all but one of the participants — the Fed would first decide when it should begin bringing its monetary policy back to more normal terms, and then stop reinvesting some or all payments of principal on the securities it had purchased during QE2.

After that, the FOMC would modify its statement on the future of interest rates, which has steadily maintained that rates will stay near zero for an extended period.

Only after raising interest rates would the Fed begin selling the securities back into the market. The public would be notified in advance of the timing and pace of those sales, and the Fed expects the selling to be “relatively gradual and steady,” but it could be adjusted to accommodate economic or financial conditions.

The bonds will be sold back into the market over several years to minimize the sales’ impact on credit markets.

Despite the plan, the Fed emphasized in the minutes that the exit strategy would be changed if necessary, based on economic or financial developments.