Fed eyeing stimulus ‘fairly soon’ unless economy improves

A third round of “quantitative easing” could be coming soon from the Federal Reserve if the economy does not pick up steam, according to minutes released Wednesday.

Several members of the Federal Open Market Committee (FOMC) said the Fed will need to do more to boost the economy if the recovery doesn’t gain momentum, according to the minutes of a July 31 meeting.

“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” the minutes stated.

The Fed is likely to be accused of playing politics if it takes action before November, as the slow economy is considered to be the biggest obstacle for President Obama’s reelection bid.

{mosads}”Many participants” of the FOMC said another massive round of bond purchases — the “quantitative easing” — could help support the economic recovery while boosting business and consumer confidence. However, a “few” members aired concerns that a further expansion of the Fed’s balance sheet could increase risk in the financial system, and make it more difficult for the central bank to unwind those moves later on.

Investors have been on high alert for all Fed communications, searching for any indications that the central bank is moving towards further efforts to help the economy. The minutes will only heighten anticipation for Fed Chairman Ben Bernanke’s public remarks on Aug. 31 at a central banker meeting in Jackson Hole, Wyo.

Bernanke and other Fed officials are adamant that the central bank is nonpolitical, but as it has tried to fulfill its mandate of maximizing employment and controlling prices in the downturn, it has found itself in the middle of a partisan fight. 

When Bernanke appeared before the Senate Banking Committee just days before the July 31 meeting, he was prodded by Democrats to take further action. Republicans, meanwhile, maintained the Fed had played its role, and said responsibility for boosting the economy rests with Congress.

Bernanke said the Fed was prepared to act if needed, while adding that the bankers would welcome efforts by Congress to address the nation’s fiscal situation in a way that does not endanger the fragile recovery.

The Fed held steady at the close of its July meeting, making no new policy moves while anticipating it would keep interest rates near zero until the end of 2014. However, as it had in recent weeks, the Fed said it stood prepared to act if the economy warranted it, and the minutes make clear that the central bank is mulling a number of options.

Beyond further easing, FOMC members discussed further extending the time frame in which it expects to keep interest rates at rock-bottom levels, noting that the move could be “particularly effective” if the Fed said at the same time it would stick with that time frame even if the economy improved. Another idea discussed was dropping a time frame for raising rates, instead having the Fed publicly state it would be looking more directly at economic data when it came to any eventual rate hikes.

Officials also discussed possibly buying up Treasury securities related to mortgage-backed securities, although some cautioned its economic impact could be “transitory.”

Another option on the menu for the Fed is cutting the interest rate it pays to banks holding reserves, in an effort to push that capital out into the broader economy. Bernanke had identified that move as an option for the Fed in congressional testimony, but the minutes show that several officials were concerned about what impact that move could have on money market funds.