Applying new policy divides Fed bankers

U. S. central bankers, having agreed unanimously in August on a broad new approach to monetary policy, were promptly divided in September over how to apply their new principles in practice, according to minutes of the Fed’s policy meeting last month.

“Most participants supported providing more explicit outcome- based forward guidance for the federal funds rate” to flesh out the new framework, the minutes said.

However participants in the Federal Open Market Committee deliberations also “discussed a range of issues associated with providing greater clarity” about the Fed’s plans, with a couple wanting a strong promise to push inflation above 2 per cent, several arguing such promises did little to help the economy at this juncture, and others arrayed around other choices, the minutes said.

That scope of the debate reflects the uncertainty the U.S. central bank is facing as it navigates a recession brought on by the global coronavirus pandemic.

Some officials noted that “in future meetings it would be appropriate” to be more specific about plans for further bond purchases, currently being added at a pace of $120 billion a month.

They also debated uncertainties around the path of the economy, with “most” worried that federal fiscal spending might not prove adequate to address the scale of the issues facing the country.

The U. S. Federal Reserve last month signalled that interest rates are likely to stay at zero through 2023, vowing to wait on rate hikes until inflation reaches 2 per cent and is set to rise moderately above that level for a time.

Fed Chair Jerome Powell warned Tuesday the outlook for the U. S. economy is “highly uncertain,” and that too little policy support could lead to more household and business insolvencies and “recessionary dynamics” where a weak recovery feeds on itself.

Fed comments since then have showed a broad divide among officials.

St. Louis Fed President James Bullard has said he expects the U. S. economy to notch a near-full recovery from the coronavirus recession by year’s end.

On the other end of the spectrum is Boston Fed President Eric Rosengren, who has warned that a second wave of Covid-19 this fall and winter could set the recovery back and create a credit crunch.

With just a few weeks until Nov. 3 when Americans pick their next president, which way the economy develops could spell a very different policy environment for whoever wins at the ballot box.

The Fed’s September decision drew two dissents. Dallas Fed President Robert Kaplan thought it tied the Fed’s hands unnecessarily. Minneapolis Fed President Neel Kashkari wanted a higher bar for future rate hikes.