Wednesday, October 12, 2011

Some Fed Governors Sought to Retain Option of QE3

Some of the members of the Federal Open Market Committee sought to keep the option of a third round of quantitative easing open, should future stimulus be required. The FOMC minutes released today revealed a number of stimulus options discussed at the September 20-21 session. In addition to reinvesting principal payments and extending maturities of the existing portfolio (a process known as operation twist) the Fed considered the following additional options to loosen monetary policy.

The potential QE3 would involve buying longer maturity bonds, without selling off the shorter dated maturities. "A number of participants saw large-scale asset purchases as a potentially more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted."

The FOMC also considered reducing the IOR rate, the rate that the Federal Reserve pays on reserve balances that depository institutions hold in accounts at various Federal Reserve Banks, in order to boost bank lending.

Most participants favored giving additional guidance on the central bank's goals and how they influence the Fed's decisions. Specifically, many felt that tying the Fed's near-zero interest rates to certain developments in the economy could help anchor expectations.

Officials that dissented believe the efficacy of monetary policy is limited at present and further stimulus has the potential to cause inflation.

Read the minutes here.

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