By Nick Timiraos
Federal Reserve officials last month reviewed how to design more
support for an economy reeling from the coronavirus pandemic while
expressing concerns over the risks of additional virus
The central bank on Wednesday released minutes of its June 9-10
meeting, at which officials signaled they expected to keep rates
near zero at least through 2022. They cut rates to near zero in
March and have sharply expanded their asset portfolio to stabilize
government debt and other lending markets.
Officials are in no hurry to remove that support. The minutes
showed they made progress last month toward consensus on a strategy
to guide borrowing costs lower by spelling out in greater detail
how long they plan to hold rates down. By contrast, the minutes
showed officials were nowhere close to agreement on a potentially
complementary tool to reinforce that guidance by committing to cap
Treasury yields with unlimited purchases of short- or medium-term
Fed Chairman Jerome Powell opened the meeting by acknowledging
national protests sparked by the police killing of George Floyd. He
cited the "extraordinary and deeply troubling events" of the
preceding two weeks, in which "injustice, prejudice and the callous
disregard for life had led to social unrest and a sense of
despair," the minutes said.
Mr. Powell told his colleagues he planned to open his news
conference following their meeting with a message to reaffirm the
central bank's "unflinching commitment" to rejecting racism and
promoting full participation of all members of society in the
Separately, Fed officials worried at the meeting that
prematurely resuming certain commercial activities without proper
public-health safeguards or voluntary social distancing could hurt
the economy in the months ahead by widening the spread of the
Officials saw "a great deal of uncertainty" about whether a safe
reopening could be achieved, the minutes said. They "expressed
concerns about the possibility that an early reopening would
contribute to a significant increase of infections."
Either way, officials believed "highly accommodative monetary
policy and sustained support from fiscal policy" would be needed to
ensure a durable recovery in jobs.
While employers reported a surprising 2.5 million increase in
employment in May, Fed officials didn't seem particularly enthused
about pickups in hiring or spending because around 20 million fewer
people were employed compared with February and because of
difficulty determining the extent to which temporary federal relief
measures, such as enhanced unemployment benefits, had supported
Officials continued deliberations over the best way to provide
more stimulus for the economy now that interest rates have been cut
to near zero. The minutes indicated those discussions were likely
to continue without any firm resolution at their next meeting,
scheduled for July 28-29, setting up a possible resolution and
announcement at their following gathering in September.
Officials reviewed how to make more explicit their so-called
forward guidance for the path of the benchmark federal-funds rate
and their bond purchases. The minutes showed support was broadest
for a strategy to condition the removal of stimulus on the economy
meeting certain thresholds, particularly related to inflation
Several officials supported a strategy in which the Fed
temporarily would allow inflation to run modestly above its 2%
target to make up for a prior inflation shortfall once the economy
recovers from the pandemic. Officials thought this approach would
potentially prevent a "premature withdrawal" of Fed stimulus, the
Such a strategy would be a significant departure from the
practice the Fed has used over the past 30 years to pre-emptively
raise interest rates to head off inflationary pressures.
Fed economists briefed policy makers last month on different
strategies to cap yields on Treasury securities by committing to
purchase whatever amounts are needed to keep yields at certain
levels. The tool has some appeal because it could reinforce
officials' intentions to keep rates low and, if investors believe
those commitments are credible, it could provide the same amount of
stimulus without requiring as many Fed bond purchases.
Still, the minutes indicated officials were in the early stages
of reviewing such plans, with many voicing skepticism. "Nearly all
participants indicated that they had many questions regarding the
costs and benefits of such an approach," the minutes said.
Several officials thought that as long as the Fed's guidance to
keep rates low for a long time was credible, the costs of yield
caps might not be worth the presumed benefits.
Some saw the tool as less compatible with the threshold-based
guidance officials preferred. Others worried such policies could
lead the Fed to lose control of its balance sheet or surrender its
autonomy to manage policy to fiscal authorities at the
Economic research presented at the meeting suggested that, with
rates at zero, the use of forward guidance and asset purchases
could require the Fed to provide stimulus for "many years to
quicken meaningfully the recovery from the current severe
The staff briefing warned that those policies wouldn't be as
effective if they weren't well understood by the public.
"Alternatively, prompt and forceful policy actions by the committee
might help focus the public's expectations around better outcomes
or reduce perceived risks of worst-case scenarios," the minutes
The Fed cuts rates when economic growth is poor to encourage
businesses and households to invest or spend. In the years after
the 2008 financial crisis, with short-term rates pinned near zero,
the Fed's other tools worked primarily by driving down long-term
rates, which made it easier for households to pay off debts and
encouraged new borrowing and risk taking.
Several Fed officials last month voiced concern that those
bond-buying tools might be less powerful now because long-term
interest rates have declined around the world, leaving less room to
influence investor behavior by pushing bond yields lower.
These officials still thought bond buying could support the
economy, however, by offsetting potential increases in long-term
interest rates or by reinforcing the Fed's forward guidance.
Write to Nick Timiraos at firstname.lastname@example.org
(END) Dow Jones Newswires
July 01, 2020 17:45 ET (21:45 GMT)
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