Fed Faced Divisions Over Low-Rate Promises Last Month -- 2nd Update

BY Dow Jones & Company, Inc. | ECONOMIC | 10/07/20 05:45 PM EDT By By Nick Timiraos

Federal Reserve officials were divided last month over how to apply their new policy framework to an economy battered by the coronavirus pandemic, according to minutes of their Sept. 15-16 meeting released Wednesday.

Some officials also believed they would eventually need to clarify their intentions around their purchases of Treasurys and mortgage-backed securities. But the divisions that surfaced over how to make their low-rate promises more explicit suggested they could confront similar challenges forging consensus on their asset-purchase plans.

New projections released at the meeting show officials expected a somewhat stronger economic rebound this year and a speedier drop in the unemployment rate than they did in June.

But the minutes show many officials premised their brighter economic forecasts on additional spending from Congress and the White House that now seems less likely to materialize soon. "If future fiscal support was significantly smaller or arrived significantly later than they expected, the pace of the recovery could be slower than anticipated," the minutes said.

President Trump said Tuesday he would suspend negotiations with Democrats in Congress on an economic relief bill until after the Nov. 3 election, dimming prospects for more spending until later this year or early next year.

Last month's Fed meeting was the first since officials adopted in August a new framework that calls for seeking periods of higher inflation after intervals, like the current one, where inflation runs below 2% and short-term rates are pinned near zero.

Fed Chairman Jerome Powell led a majority of his colleagues to provide more explicit guidance around the central bank's low-rate intentions last month. "Doing so at this meeting was viewed as an especially important way of affirming the committee's commitment to achieving the economic outcomes articulated in the" new framework, the minutes said.

Fed officials laid out a three-part test before they consider lifting short-term rates from near zero. First, they need to be satisfied that labor-market conditions are consistent with their maximum employment goals, which weren't spelled out. Second, inflation must reach 2%. Third, they will need some evidence -- from forecasts or market-based measures -- that inflation will continue to run moderately above 2%.

Two members of the Fed's rate-setting committee dissented from the decision for opposing reasons. Dallas Fed President Robert Kaplan favored weaker guidance, while Minneapolis Fed President Neel Kashkari preferred a bolder and less qualified description.

The minutes showed the disagreements may have run deeper than reflected in the 8-2 vote, either because nonvoting reserve bank presidents didn't support the changes or because some officials didn't feel strongly enough about their reservations to dissent.

The minutes said several participants shared the position articulated by Mr. Kaplan. This minority view, the minutes said, reasoned that "with longer-term interest rates already very low, there did not appear to be a need for enhanced forward guidance at this juncture or much scope for forward guidance to put additional downward pressure on yields." These officials also expressed concern that such guidance would limit the Fed's flexibility for years.

The minutes indicated one other participant sided with Mr. Kashkari.

Even though the minutes indicated a contentious debate, the diversity of views didn't seem likely to diminish the commitment of Fed officials to carry out their policy, said Roberto Perli, an analyst at Cornerstone Macro.

Still, the debate could have implications for a related policy question around how the central bank plans to clarify its intentions around asset purchases. With long-term interest rates at low levels, officials could make similar arguments to support a view that there is less room for monetary policy to drive down yields.

"If you were hesitant about making commitments on interest rates, one would think those hesitations would be even stronger for committing to maintain asset purchases until an economic outcome is reached," said Michael Feroli, chief U.S. economist at JPMorgan Chase.

Fed officials have bought trillions of dollars of Treasurys and mortgage-backed securities to repair broken financial markets since March. Officials provided a slight clarification last month by stating that these purchases were being maintained now to support a faster economic recovery.

Some Fed officials last month said they should "further assess and communicate" at future meetings how those asset purchases would be maintained. Since mid-June, the Fed has been purchasing $80 billion a month in Treasurys and $40 billion a month in mortgages, net of redemptions, down from even larger quantities in the spring.

The Fed isn't expected to make changes at its next policy meeting, Nov. 4-5.

"There is nothing here that suggests the committee is overly eager to announce any changes to their purchase program," said Thomas Simons, an economist at Jefferies LLC.

The Fed hasn't said how long it plans to continue such purchases or whether it might shift its Treasury purchases to longer-dated securities, as the Fed did during its 2012-14 bond-buying program to drive down long-term yields. Currently, the Fed is purchasing a wider range of short-, intermediate- and long-term securities. Rates across the Treasury yield curve are much lower than they were last decade.

During an online discussion on Wednesday, New York Fed President John Williams pushed back against the implication that the Fed was holding back on asset buying. "We are currently purchasing an extremely high level of assets already," he said. "It's not the case that we are not using this tool."

--Michael S. Derby contributed to this article.

Write to Nick Timiraos at nick.timiraos@wsj.com

  (END) Dow Jones Newswires
  10-07-20 1745ET
  Copyright (c) 2020 Dow Jones & Company, Inc.

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