Fed mulls new tools to battle slow growth

Several of the Federal Reserve's top policy makers are urging the central bank to look at new tools to bolster the financial system amid a weak recovery. According to the minutes of the latest Federal Open Market Committee (FOMC) meeting, published on Wednesday, concerns about weak growth and spillovers from the crisis in Europe are pushing the bank to reassess its tool kit. After nearly four years in which the Fed has deployed an arsenal of measures to get the world's largest economy back on track, a slowdown in the first quarter and signs of further weakness have raised fears, and the prospect of new weapons being deployed. According to the minutes of the FOMC's June 19-20 meeting, "several participants commented that it would be desirable to explore the possibility of developing new tools to promote more accommodative financial conditions and thereby support a stronger economic recovery." At the meeting the Fed unleashed a fresh wave of economic stimulus as it predicted subpar US growth would be even worse this year than thought. After the two-day meeting the bank decided to double down on a program to lower long-term borrowing costs, as it sharply revised down 2012 growth projections to between 1.9 and 2.4 percent. That was a half percentage point cut from predictions made as recently as April this year, when cautious optimism reigned. The plan is designed to push down interest rates on long-term bonds, encouraging investors to move money into more neglected securities and lowering costs for borrowers. The central bank will continue to switch short-term US bonds for those dated between six and 30 years through year-end, a plan dubbed "Operation Twist." In total the program will be worth around $267 billion. But the minutes also laid bare divisions over how much more the Fed should do. "A few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth in employment and to ensure that the inflation rate would be at the Committee's goal." However "several others noted that additional policy action could be warranted if the economic recovery were to lose momentum, if the downside risks to the forecast became sufficiently pronounced, or if inflation seemed likely to run persistently below the Committee's longer-run objective." According to the FOMC statement last month, Richmond Fed president Jeffrey Lacker voted against extending "Operation Twist" because he did not believe that further monetary stimulus would make "a substantial difference" for economic growth and employment "without also increasing inflation by more than would be desirable."