US Fed rejects formal targets, for now

The Federal Reserve discussed and for now rejected the adoption of revolutionary targets for growth, unemployment and inflation at a meeting earlier this month, minutes published Tuesday showed. As the central bank struggles with limited and increasingly expended tools to stoke the US recovery, the minutes of a recent policy meeting detailed a broad discussion about new tools that could bend market expectations toward more robust growth. Expectations about what the Fed will do in future can have as much influence on investments and the markets as what the central bank eventually does. But the account of the meeting in early November showed members of the Fed's top policymaking panel wrestling with a series of seemingly imperfect or unpredictable new tools, with little consensus on whether benefits outweighed risks. The measures included setting explicit inflation and growth targets, or keeping interest rates at certain levels until unemployment or inflation benchmarks are met. Each measure, if adopted, would amount to a small revolution in the way the central bank works and could have a broad impact on growth and stability. But in the end, Fed members appeared to bat down each suggestion in favor of further study. Fed Chairman Ben Bernanke instead suggested the body should "give consideration to a possible statement of the committee's longer-run goals and policy strategy," the minutes said. Bernanke also encouraged further study of ways of incorporating ideas about future policy into economic projections, leaving the door open to further action. The details of the discussion are unlikely to placate those calling for urgent Fed action to address high unemployment, or inflation hawks who are worried that the Fed is being too interventionist. But some analysts said the debate was needed before further stimulus measures are considered. "The Fed will want to get this communication rat's nest figured out as soon as possible so that the decks are clear, if needed, for QE3," said Stephen Stanley of Pierpont Securities referring to a possible third round of monetary easing. But there was little sign of the debate concluding soon. In discussing a formal inflation target -- a measure used by many central banks to influence expectations about how the economy will progress -- arguments were made on both sides. "Many participants pointed to the merits of specifying an explicit longer-run inflation goal, but it was noted that such a step could be misperceived as placing greater weight on price stability than on maximum employment." The primacy of each pillar of the Fed's dual mandate -- prices and employment -- is fiercely disputed within the central bank and among economists. Similarly, "a number of participants expressed support" for making future rate decisions conditional on "numerical thresholds for unemployment and inflation." But that proposal also had detractors. "Several participants noted that such thresholds could be confusing in the absence of a clear expression of the committee's longer-term goals." The committee also considered the possibility of setting an intermediate target such as nominal gross domestic product, which takes into account both growth and prices. Fed staff presented model simulations to the committee that suggested that nominal GDP targeting could be useful in boosting the economic recovery while keeping inflation under control. But others said the time was not ripe for such a move. "A number of participants expressed concern that switching to a new policy framework could heighten uncertainty about future monetary policy, risk unmooring longer-term inflation expectations, or fail to address risks to financial stability." Whatever the outcome of the meeting, markets welcomed the notion that the Fed is still looking to do more to boost growth. The Dow briefly spiked after the early release of the minutes, before falling back.