Jobseekers queue for a job Fair in New York city on Feb. 24, 2010.© Shannon Stapleton / Reuters/Reuters
The Federal Reserve is unenthusiastic about the U.S. economic recovery, but not so much so that it is willing to deploy further stimulus without clear evidence of a slowdown.
In a shift, only a "couple of members" of the Fed's policy committee were leaning toward new measures at a meeting last month, according to minutes released Tuesday in Washington. In January, a "few members" were supportive of another attempt by the central bank to lower interest rates.
While the change was subtle, it caught the attention of investors.
Stock markets in New York and Toronto dropped after the release of the minutes of the Federal Open Market Committee's March 13 meeting, as traders bet against the prospect of the another multibillion-dollar purchase of financial assets by the Fed.
With the jobless rate falling and business confidence rising, policy makers have indicated that further stimulus will be contingent on the evolution of economic data. The minutes reinforced that stance, indicating that the bar for new measures will be high.
"There is little, if any, support for any new program of asset purchases in the short term," Paul Ashworth, chief U.S. economist at Capital Economics in Toronto, advised clients in an e-mail.
Fed chairman Ben Bernanke's subdued commentary about the state of the economy last week had stoked speculation on Wall Street that the central bank would resort to a third round of quantitative easing, or QE.
Previous rounds of stimulus were good for stock prices, and the prospect of the Fed flooding the financial system with yet more cash was again putting upward pressure on equity markets.
That trend was at least partially reversed Tuesday. The Standard & Poor's Index dropped 0.4 per cent, to close at 1,413.31, after rising to its highest level since 2008 on Monday. The U.S. dollar rose because lower odds of a third round of QE mean lower odds of the Fed adding to the supply of greenbacks. Bond prices also rose.
At an economics conference in Washington a little more than a week ago, Mr. Bernanke said the rapid decline of the U.S. unemployment rate in recent months was unlikely to last because the economy wasn't growing quickly enough to generate enough new jobs.
Therefore, "further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies," Mr. Bernanke said.
Some on Wall Street saw his remarks as heralding so-called QE3. But Mr. Bernanke's comments could just as easily have been interpreted as being comfortable with the Fed's conditional pledge to leave borrowing costs exceptionally low until at least the end of the 2014 – an unprecedented commitment that critics say risks stoking inflation.
The newly released minutes back the later interpretation. Fed officials clearly are uncomfortable with an unemployment rate of 8.3 per cent, well in excess of the bank's unofficial target of something closer to 5.5 per cent. Yet they made no change to their policy stance at the meeting, aside from acknowledging that the economy was showing minor improvement.
"A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of two per cent over the medium run," the minutes said.
Not only does that imply reduced support for stimulus, but it also suggests policy makers will keep QE3 on the shelf as long as indicators show the economy is growing, however slowly.
In January, there were no such conditions attached to stimulus, even by those who were leaning toward QE3. At the first policy committee meeting of the year, the few members who were sympathetic toward more stimulus told their colleagues that current economic conditions "could warrant the initiation of additional securities purchases before long."