Fed reinforces expectations for more credit-easing moves
The minutes of the Federal Reserve’s September meeting suggest that policymakers were leaning toward pumping more money into the financial system if the economy failed to pick up speed soon.
The minutes, released on Tuesday, are likely to reinforce already high expectations that the Fed next month will announce a major new plan to buy Treasury bonds, with the goal of pushing longer-term interest rates down further.
But with Treasury market interest rates down sharply over the last month in anticipation of ramped-up Fed buying, some investors and traders appear to be taking profits: Bond yields were up slightly Tuesday after the minutes were made public.
The two-year T-note yield was at 0.36%, up from the record low of 0.33% on Friday. (The bond market was closed Monday in observance of Columbus Day.) The 10-year T-note yield was at 2.42%, up from 2.38%.
Disappointing investor demand at the Treasury’s sale of $32 billion in new three-year notes Tuesday contributed to the market’s indigestion.
The stock market, however, was mostly higher and the dollar was weaker.
Fed policymakers suggested that they were poised to act, barring a surprising upturn in the economy. Two key passages from the minutes of the Sept. 21 meeting:
Several members noted that unless the pace of economic recovery strengthened or underlying inflation moved back toward a level consistent with the [Fed’s] mandate, they would consider it appropriate to take action soon.
Meeting participants discussed several possible approaches to providing additional accommodation but focused primarily on further purchases of longer-term Treasury securities and on possible steps to affect inflation expectations.
The idea of targeting inflation expectations presumably would be to convince consumers and investors that the Fed wants inflation to rise more quickly in the near term. In theory that would push people to borrow more, spend more and save less. It's a controversial policy idea, to say the least.
Even before the dismal September employment report, a number of Fed officials have in recent weeks laid out the argument for launching a new bond-purchase program -- so-called quantitative easing. Some analysts say the Fed may commit to buying as much as $1 trillion of Treasury issues.
But at last month’s meeting policymakers debated whether new bond purchases would have the desired effect of spurring economic growth, assuming interest rates indeed declined further.
"Participants reviewed the likely benefits and costs associated with a program of purchasing additional longer-term assets -- with some noting that the economic benefits could be small in current circumstances -- as well as the best means to calibrate and implement such purchases,” the minutes said.
In a speech on Oct. 1, New York Fed Bank President William Dudley sought to dispel the idea that quantitative easing would be the equivalent of pushing on a string. He said he believed that the economic effect would be “significant.”
Kansas City Fed President Tom Hoenig, however, vociferously opposes further Fed easing, and said so again in a speech on Tuesday.
For bond investors and speculators, the question is how much of an interest-rate decline from potential Fed bond purchases already is baked into the market.
-- Tom Petruno
Top photo: New York Fed Bank President William Dudley. Credit: Andrew Harrer / Bloomberg News
Bottom photo: Kansas City Fed Bank President Tom Hoenig. Credit: Nati Harnik / Associated Press