Some at Fed sought additional stimulus
Divided board will hold longer session in Sept.
WASHINGTON - Some Federal Reserve officials pushed in August for a more aggressive response to the economy’s slowdown. They settled for a plan to keep rates near zero for another two years and won agreement to discuss more options in September.
Minutes of the Aug. 9 policy meeting, released yesterday, show that Fed officials discussed a range of possible actions, including another round of Treasury bond purchases. Some said a weaker economy called for such a step.
In the end, Fed officials said they planned to keep rates low until at least mid-2013, assuming the economy remains weak. They also added a second day to their September meeting. That raised speculation the Fed would take some further action after that meeting.
The minutes show officials also discussed shifting the mix of the Fed’s holdings into long-term Treasury securities. Some members raised the idea of tying record-low interest rates to a level of unemployment or inflation, instead of the set time period.
The bond purchases are intended to keep long-term rates low and aid the economy. The second round, announced last year, sparked a 28 percent rally in the Dow Jones industrial average through April 29.
Three Fed members opposed including a two-year timeframe in the August statement. The 7-to-3 vote marked the first time in nearly 20 years that at least three members dissented from a Fed statement.
The minutes also show “some participants’’ made the case that any additional stimulus at this time could fuel inflation. The minutes do not identify members by name.
David Jones, chief economist at DMJ Advisors, a Denver consulting firm, said the minutes indicate Fed officials were leaning toward replacing short-term securities with longer-term securities, rather than launching a third round of buying bonds.
“By saying that they will have a two-day meeting to talk extensively about the tools they have, that is a strong signal to the markets that they are preparing to do something,’’ Jones said. “I don’t think they have ruled out a third round of bond buying, but I think at the moment they consider lengthening the maturities of their holdings as preferable.’’
Charles Evans, the president of the Federal Reserve Bank of Chicago, said he was one of the officials who favored more aggressive action. He was also one of the seven officials who supported the two-year plan for keeping rates near zero.
Analysts have speculated that such a high level of dissent makes it harder for Fed chairman Ben Bernanke to rally support for more action. Others say the August vote shows Bernanke is willing to press forward, even with a divided board.
And at least one dissenter may be softening his opposition. Narayana Kocherlakota, president of Federal Reserve Bank of Minneapolis, said he would not seek to overturn the August decision.
Investors had hoped Bernanke would provide details of the Fed’s next moves during a recent speech. But Bernanke offered no new steps.
The economy grew at an annual rate of just 0.7 percent in the first six months of this year.