Federal Reserve officials said record-low interest rates might fuel “excessive” speculation in financial markets and possibly dislodge expectations for low inflation, according to minutes of their meeting released today.
“Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period,” minutes of the Nov. 3-4 meeting said, “including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations.”
While policy makers agreed that the chances of such effects were “relatively low, they would remain alert to these risks,” the minutes showed. Fed officials at their meeting indicated the benchmark lending rate would remain near zero “for an extended period” as long as inflation expectations are stable and unemployment fails to decline.
Gold prices touched an all-time high of $1,174 an ounce in New York yesterday as a slumping dollar boosted the appeal of alternative assets. The Standard & Poor’s 500 index has jumped 63 percent since its 2009 low on March 9, and the U.S. auctioned $44 billion of two-year debt yesterday at a yield of 0.802 percent, the lowest ever.
Speculative Capital
Financial officials in Japan and China, Asia’s two largest economies, said last week that the Fed’s interest-rate policy risks spurring speculative capital that may inflate asset prices and derail the global economic recovery.
“Participants noted that the recent fall in the foreign exchange value of thedollar had been orderly and appeared to reflect an unwinding of safe-haven demand in light of the recovery in financial market conditions this year,” the minutes said. “Any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching.”
The dollar weakened to the lowest level versus the yen in a month after the minutes were released. The dollar fell 0.5 percent to 88.56 yen at 3:21 p.m. in New York from 88.97 yesterday, after touching 88.36, the lowest level since Oct. 9.
Less Than Estimated
A report today showed the U.S. economy grew less than initially estimated last quarter as consumer spending trailed forecasts. The economy expanded at a 2.8 percent annual rate in the third quarter, less than the initial estimate of a 3.5 percent pace of expansion, the Commerce Department report showed.
“Most members projected that over the next couple of years, the unemployment rate would remain quite elevated and the level of inflation would remain below rates consistent over the longer run with the Federal Reserve’s objectives,” the minutes said.
Policy makers debated the usefulness of selling assets as part of the so-called exit strategy from the unprecedented expansion of credit to help reduce the central bank’s balance sheet and reserves held by commercial banks.
Several officials said asset sales “could be a useful tool” and “reinforce the effectiveness” of paying interest on reserves held at the Fed by commercial banks. Other policy makers “had reservations about asset sales,” especially before any decision to raise interest rates, and said such sales may increase longer-term rates, the minutes said.
Trimmed Forecasts
Fed officials trimmed their forecasts for the U.S. jobless rate in 2010 and 2011, the minutes showed. Fed governors and regional bank presidents predicted the jobless rate will range from 9.3 percent to 9.7 percent in next year’s fourth quarter, down from their June projection of 9.5 percent to 9.8 percent.
The financial crisis has eased in recent months for banks and large corporations, which have issued a record $1.171 trillion in bonds this year, according to Bloomberg data. The cost of three month loans in dollars between banks was 0.261 percent today, according to the British Bankers Association. That’s down from 1.41 percent at the start of the year.
While large companies are taking advantage of the Fed’s low interest-rate policy in capital markets, consumers face tighter terms and less available credit. Consumer loans held by commercial banks in the U.S. fell to $846.7 billion in October, down 0.7 percent from the same month a year earlier.
‘Tight Conditions’
“Participants noted that the dichotomy between significant easing of conditions in capital markets and continuing tight conditions in the banking sector implied that financing conditions differed for large and small firms,” the minutes said.
The Fed’s mandate for “maximum employment” remains challenged as businesses continue to reorganize and fire staff.
The U.S. economy has lost 7.3 million jobs since the recession began in December 2007. The unemployment rate last month rose to a 26-year high of 10.2 percent. U.S. payrolls shrank by 190,000 jobs last month, and the average workweek held at a record low.
