Fed reinforces expectations for more action to bolster the economy

The minutes of the Federal Reserve’s Sept. 21 meeting suggest that policymakers were leaning toward pumping more money into the financial system if the economy failed to pick up speed soon.

The minutes, released Tuesday, are likely to reinforce already high expectations that the Fed next month will announce a major new plan to buy U.S. Treasury bonds, with the goal of pushing longer-term interest rates down further.

“Several members noted that unless the pace of economic recovery strengthened or underlying inflation moved back toward a level consistent with the [Fed’s] mandate, they would consider it appropriate to take action soon,” the minutes said.

“Meeting participants discussed several possible approaches to providing additional accommodation but focused primarily on further purchases of longer-term Treasury securities and on possible steps to affect inflation expectations.”

A number of Fed officials, including New York Fed Bank President William Dudley, have in recent weeks laid out the argument for launching a new bond-purchase program — so-called quantitative easing. Some analysts say the Fed may commit to buying as much as $1 trillion of Treasury issues.

But the case for more Fed easing isn’t unanimous among policymakers. Kansas City Fed President Thomas Hoenig said in a speech Tuesday that “there simply is no strong evidence” that additional Fed action would bolster the economy.

Market interest rates on Treasury securities and other bonds already have fallen sharply in recent months as investors have bet that the Fed would ramp up Treasury purchases. On Tuesday bond yields inched up as some investors took profits. The yield on the 10-year T-note rose to 2.42% from 2.38% on Friday. The bond market was closed Monday for Columbus Day.

The minutes showed that the Fed also discussed the controversial idea of boosting its inflation target. In theory, by convincing consumers and investors that the central bank wanted inflation to rise more quickly in the near term the Fed could encourage people to borrow more, spend more and save less.

Higher inflation, however, would be at odds with the Fed’s goal of pushing interest rates lower, because it would discourage investors from buying bonds.

tom.petruno@latimes.com