Fed May Be More Aggressive With Bond Buying Next Time Around

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Federal Reserve officials, who are midway through an unprecedented review of how they conduct monetary policy, took a little victory lap over their crisis-era bond purchases and suggested they may use the practice even more aggressively next time.

“The committee could proceed more confidently and preemptively in using these tools in the future if economic circumstances warranted,” said the minutes from the Fed’s July 30-31 meeting of the Federal Open Market Committee, released Wednesday in Washington.

That declaration came in a special section of the minutes that provided an update of the central bank’s ongoing framework review.

The Fed took a series of unorthodox steps to shield the U.S. economy during the 2008-2009 financial crisis and Great Recession. In addition to pledging to keep interest rates at zero for an extended time, the central bank purchased more than $3 trillion in Treasuries and mortgage-backed securities in a highly controversial policy known as quantitative easing.

The move aimed to stimulate growth by suppressing long-term borrowing costs. Critics feared it would lead to run-away inflation. Opinions are still divided over how much the purchases boosted the economy, but inflation has remained remarkably muted.

“A number of participants commented that, as many of the potential costs of the committee’s asset purchases had failed to materialize, the Federal Reserve might have been able to make use of balance sheet tools even more aggressively over the past decade,” the minutes said.

Stephen Stanley, chief economist at Amherst Pierpont Securities LLC, said the comments signal the Fed won’t be shy about using asset purchases again.

“They’re likely to be less cautious about initiating and will do more than they did last time, if they deem it necessary,” he said.

Regarding the ongoing framework review, policy makers also made clear they had not ruled out big changes aimed at improving they way they pursue their policy goals.

The central bank launched the process earlier this year and has hosted a series of events to gather input from across the country. It was prompted largely by their worry that persistently low inflation and interest rates will make it difficult for the Fed to combat recessions with their existing monetary policy strategy and tools.

Perhaps most consequentially, officials have discussed whether they might seek to deliberately overshoot their 2% inflation objective after an extended period of below-target inflation, referred to by economists as a makeup strategy. Annualized price rises in the U.S., as measured by the Fed’s preferred gauge, have run consistently below 2% since January 2012, when the central bank introduced its target.

“In principle, such makeup strategies could be designed to promote a 2% inflation rate, on average, over some period,” the minutes said.

Many participants, however, said the success of any makeup strategy would depend heavily on investors’ understanding of that policy and on their confidence that the Fed would follow through once it announced such an intention.

The Fed is unlikely to make any changes soon. Officials said any potential modifications “would take some time and that the process would be careful, deliberate and patient.”

— With assistance by Craig Torres

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