November 22, 2011 / 7:45 PM / 7 years ago

Fed officials warm to communications changes

WASHINGTON (Reuters) - The Federal Reserve appears to be edging closer to providing financial markets with more detail to gauge the likely path of monetary policy as a way to buttress a weak recovery.

The central bank held a wide-ranging debate on its communications strategy at a meeting earlier this month, minutes released on Tuesday showed, suggesting a shift in the way it frames policy may be its next step.

Most Fed officials supported providing the public with more information to gauge the policy outlook, but they rejected the idea of tying their actions to targets for growth or the level of prices, according to the minutes of the November 1-2 meeting.

“A majority of participants agreed that it could be beneficial to formulate and publish a statement that would elucidate the committee’s policy approach” and provide a firmer clue about the direction of interest rates, the Fed said.

Many officials saw merit in setting an explicit inflation target, although some worried it would be seen as taking the emphasis off the central bank’s effort to lift employment.

A few Fed officials believed the outlook for modest growth might warrant an easier policy, but the minutes said additional monetary stimulus would likely be more effective if combined with more details on the central bank’s goals and strategy.

Financial markets had little reaction to the minutes, which were seen as shedding little new light on the course of Fed policy.


Still, many analysts look for some form of easing in early 2012, most likely in the form of a communications tweak that would seek to push out expectations for when the Fed will eventually begin to withdraw its support for the economy.

“We see the committee as inching closer to a meaningful change on this front,” Barclays Capital economist Michael Gapen said after the minutes were released.

The central bank cut benchmark interest rates to near zero almost three years ago and bought $2.3 trillion in bonds to keep interest rates low and speed up growth.

More recently, it said it would shift its portfolio more toward longer-term bonds to lower mortgage rates and that it was unlikely to raise borrowing costs until at least the middle of 2013 — an effort to reassure markets it will be in no rush to tighten financial conditions.

Fed officials are debating whether the economy has made sufficient progress for them to hold off further action or whether persistently high unemployment warrants more stimulus.

Economic data since the meeting has suggested that the economy is growing more strongly than expected, even if not at a pace likely to quickly lower the jobless rate, which stood at a lofty 9 percent in October.


At the meeting, the Fed cut its forecast for growth, raised projections for unemployment and said it was considering the possibility of buying more mortgage debt to supercharge a modest recovery, but it took no immediate action.

One official, Chicago Fed President Charles Evans, said the economy needed help immediately and dissented against the decision to stand pat, which was approved by a vote of 9-1.

Fed Chairman Ben Bernanke after the meeting described the pace of growth as “frustratingly slow” and said Europe’s debt crisis posed a big economic risk.

Policymakers have been looking for ways to reassure financial markets the Fed will maintain its ultra-easy money policy until the recovery is firmly entrenched. Pushing out expectations for when monetary policy will tighten can keep borrowing costs low, since they incorporate rate expectations.

At the meeting, Bernanke asked a group of officials studying communications improvements to assess whether the Fed should issue a statement on the Fed’s longer-run goals and policy strategy. The chairman also asked them to study whether the Fed should publish the views of individual officials regarding the appropriate path of interest rates.

Officials discussed tying interest rate rises to specific conditions, such as an unemployment or inflation rate, but several policymakers worried such thresholds could be confusing. Fed officials also rejected setting explicit goals in terms of growth or the level of prices.

“Switching to a new policy framework could heighten uncertainty about future monetary policy,” the Fed said.

Reporting by Mark Felsenthal; Editing by Andrea Ricci

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