Federal Reserve policymakers have backed away from the need for another round of monetary stimulus as the U.S. economy gradually improves. Minutes of the central bank's meeting published on Tuesday showed only two of the policy-setting Federal Open Market Committee's 10 voting members saw the case for additional monetary stimulus.
That was a big shift from January, when several officials thought economic conditions might warrant a third round of bond purchases to boost growth. The surprise change in tone hammered U.S. stocks, bonds and gold, while boosting the dollar. The Fed's assessment of the economy remained cautious as policymakers worried about a still elevated U.S. jobless rate and potential risks to the recovery.
The more hands-off tone on policy also contrasted sharply with comments last week from Fed Chairman Ben Bernanke, whose focus on high unemployment led investors to believe he might be getting ready to deliver another round of monetary stimulus, known as quantitative easing, or QE3. "The minutes threw water on the resurrected notion that QE3 was still very much on the table," said Clark Yingst, chief market analyst at Joseph Gunnar & Co in New York.
Yet the Fed remained sober about U.S. prospects, expressing some uncertainty over the course of the economy over the next few years. Members "generally agreed that the economic outlook, while a bit stronger overall, was broadly similar to that at the time of their January meeting." Most Fed officials did not believe the recent uptick in growth was sufficient to materially alter their growth forecasts, the minutes said.
The Fed will update its outlook at its next meeting on April 24-25, when Bernanke will deliver one of his quarterly press conferences, giving him a chance to clear up lingering doubts about prospects for another round of bond buying to support economic growth.
Investors are searching for clarity after being whipsawed over the past month. U.S. stocks fell and the S&P 500 retreated from four-year highs on Tuesday as the Fed minutes showed less urgency for easing. U.S. Treasuries also tumbled, pushing the yield on the benchmark 10-year note to 2.3 percent, a level last seen in late March. It was the latest U-turn as rates had climbed earlier in March on brightening U.S. data, only to tumble again when Bernanke indicated that easing still remained an option.
What seems clear is that the central bank wants more definitive signs of the economy's resilience before setting a firm course. U.S. gross domestic product had expanded at a 3 percent annual rate in the final three months of last year and even though GDP growth is broadening, its pace this quarter is expected to have slowed to around 2 percent. Unemployment has come down quite rapidly from 9.1 percent last summer to the current 8.3 percent, but Fed officials continue to see plenty of hurdles ahead.
"While recent employment data has been encouraging, a number of members perceived a non-negligible risk that improvements in employment could diminish as the year progressed," the minutes said.
Similarly, the Fed said financial market strains had eased, in part reflecting recent policy actions to stem the euro zone debt crisis, but they still posed significant downside risks to economic activity. At the same time, consumer spending, a key driving force behind U.S. economic growth, faces plenty of challenges, including a weak housing market and high levels of household debt, the minutes said. This creates an uncertain picture for U.S. growth prospects.
"While a few participants indicated that their expectations for real GDP growth for 2012 had risen somewhat, most participants did not interpret the recent economic and financial information as pointing to a material revision to the outlook for 2013 and 2014," the Fed minutes said.
The caution coincides with a warning from International Monetary Fund Managing Director Christine Lagarde on Tuesday that the global outlook remains "very fragile" despite recent improvements.
The Fed minutes noted that most members expected the recent run-up in oil and gasoline prices would push up inflation temporarily, but price gains would then moderate with inflation returning to 2 percent or lower, the level it views as consistent with price stability. In response to the worst recession in generations, the U.S. central bank slashed official interest rates to effectively zero and embarked on a rare course by purchasing some $2.3 trillion in Treasury and mortgage-linked bonds in an effort to boost growth.
The introduction of press briefings last year was part of an effort to enhance communications at an extraordinary time for Fed policy. The minutes showed the Fed is considering taking further steps in the direction of more transparency, possibly tweaking its communications with markets, but it made clear it does not intend to take any new such actions imminently.