September minutes show Fed close to easing

By Greg Robb

WASHINGTON (MarketWatch) — There was a general sense among many Federal Reserve officials that additional monetary-policy easing may be appropriate “before long,” according to a summary released Tuesday of the Sept. 21 discussions.

Members of the rate-setting Federal Open Market Committee viewed recent growth and inflation trends as unsatisfactory.

“Several members noted that unless the pace of economic recovery strengthened or underlying inflation moved back toward a level consistent with the FOMC’s mandate, they would consider it appropriate to take action soon,” the summary said. The release of the minutes helped the S&P 500 Index /quotes/comstock/21z!i1:in\x (SPX 1,170, +4.45, +0.38%) turn higher on the session. Read more about the day’s trading action in Market Snapshot.

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“it is clear that the focus of discussion at the FOMC is on what further measures may be implemented to support the economy, and that those arguing that a ‘do-nothing’ approach is the best strategy are increasingly in the minority,” wrote Josh Shapiro, chief U.S. economist at MFR Inc., in a note.

Shapiro thinks a gradual easing is more likely in November as a more aggressive approach might find more opposition.

Fed officials focused their discussion on a second round of buying Treasurys, or quantitative easing. The purchases are seen as a way to keep the economy from slipping into a damaging period of declining inflation and slow growth.

The minutes helped to cement market expectations that further quantitative-easing measures are on the way. Several Fed officials, including William Dudley, the president of the New York Federal Reserve, have indicated they would like to see more quantitative easing. See earlier story on Dudley's speech.

The minutes also show that many novel policy approaches were on the table because the Fed wants to boost inflation expectations.

Odds favor trade war

With U.S. impatience growing over China's reluctance to allow its currency to appreciate, U.S.-imposed trade barriers seem likely, Alen Mattich says. If China allowed inflation to run fast enough to improve U.S.'s terms of trade, that might improve the situation. But this might take too long.

Options that were discussed included being more specific about an inflation target; targeting a path for the price level rather than the rate of inflation; or targeting a path for the level of gross domestic product without inflation adjustment. Dudley outlined some of these options in his speech.

The officials said there were still low odds of a period of deflation or a double-dip recession.

Fed officials did not prepare forecasts at this meeting, but the Fed staff trimmed its growth estimates for 2010 and 2011.

Officials stuck to their general forecast that the economy would continue to strengthen next year. But substantial slack was expected to be elevated at the end of 2012.

Some Fed officials said the current low growth rate could linger and leave the economy exposed to potential negative shocks.

The minutes make no mention of the impact that possible Fed easing was having on the dollar’s value in foreign-exchange markets. Read more about the dollar and currencies.

IMF, impact on jobs

The issue was at center stage at this weekend’s International Monetary Fund meeting, as economic officials from around the globe complained that the prospect of further Fed easing is spilling over into their economies through strong investment flows, which is forcing them to hike interest rates and consider other measures to keep their economies stable.

Fed officials debated the cause for the stubbornly high unemployment rate, according to the minutes.

Some Fed officials say that uncertainty about Washington policy is holding back employment. Others see a “mismatch” between the skill level of workers and the job openings.

While many other Fed officials see these as playing some role in the weak labor market, they think weak demand is the key factor holding back hiring, the summary showed.

Greg Robb is a senior reporter for MarketWatch in Washington.