NEW YORK (Reuters) - The U.S. Federal Reserve considered a range of actions to help a struggling economy at its August meeting, including the unprecedented step of tying the interest rate policy outlook to a specific unemployment level.
“It’s essentially they wanted to punt and put out a strong forward looking statement instead. It’s all a confidence game. If Bernanke and the Fed can get everybody on board to think that the economy is not in that bad a shape, people will still buy cars and houses.”
“The minutes from the August 9 FOMC meeting show that the decision to extend the September meeting to 2 days (announced by Bernanke at Jackson Hole) was taken on August 9, with the intention of discussing the potential costs and benefits of various potential tools to promote a stronger recovery. This suggests there is potential for that meeting to take further action beyond extending the forward guidance for low rates through mid 2013 as was taken at the August 9 meeting. The minutes show that while there were 3 dissenters to that decision, there were also others pushing for more. After Evans’ dovish remarks today, hopes for QE3 should be quite high, though this is just one of the tools that the FOMC will consider. Increasing the average maturity of the securities in the balance sheet is another option on the table.
“Clearly reading the minutes, the Fed was having a discussion of the labor slack in the third quarter and what type of action to take. We are not convinced that will lead to a course of action next month, but it will be vigorously discussed. Still, it’s interesting to see the debate and what was captured in the minutes.
“I’m not entirely sold a plan will come out of next month’s meeting, but you are not going to get a passive message no matter what.”
“This certainly will increase the expectations of additional easing measures at the September 20 meeting. Overall, the fact that more members wanted to take stronger action suggests the Fed will come up with additional measures. It’s slightly supportive for risk sentiment and we’re seeing a bit of a dollar sell-off but nothing dramatic. It’s still tough to get aggressive ahead of the nonfarm payrolls data Friday. Those will probably be a reminder of just how anemic the U.S. economy is, and there are a lot of people looking to sell on any risk rallies. Also, month-end positioning is having an effect. Some dollar strength today was due to month-end demand.”
“They’re dovish; they lean dovish. We knew that coming out of Jackson Hole. I think the employment number and the ISM number are going to tilt them in whatever direction they’re going to go. Thursday, Friday, employment and ISM, that will give them the mandate.”
STOCKS: U.S. stocks held onto slight earlier losses
BONDS: U.S. Treasury prices slightly extend gains.
FOREX: The dollar briefly pares gains versus euro