Fed’s 2010 stimulus decision was no slam dunk

January 19 04:00 2016

Federal Reserve policymakers vigorously debated whether to launch its $600 billion bond buying stimulus in November 2010, with several officials doubting it would lift the sluggish economy, transcripts from a Fed meeting show. In the end, only Kansas City Fed chief Thomas Hoenig opposed the program, commonly known as QE2, for the Fed’s second round of quantitative easing. But other Fed “hawks” — those worried about the risk of inflation — voiced more concerns than were publicly aired at the time of the November 2-3 meeting.federal-reserve-building

“I’m far from convinced that more monetary accommodation can do much, if anything, to speed up the pace of this recovery at this point,” Philadelphia Fed President Charles Plosser said at the meeting. The Fed releases transcripts of its meetings annually after a five-year lag. A similar $1.7 trillion dollar bond purchase program in 2009 was credited with preventing the economy from spiraling into a deeper recession or even depression after lending channels froze. But with long-term interest rates already low, Fed officials fretted that another move to push down rates further eventually would stoke excessive inflation without stimulating more borrowing by consumers and businesses.

“I remain opposed to ‘shock and awe’ approaches to monetary policy,” St. Louis Fed chief James Bullard said. “The Fed is capable of a lot of things, but is not capable, in my view, of moving the dial tremendously on economic growth from here.” Dallas Fed President Richard Fisher noted that by printing more money and lowering Treasury yields, the Fed would open itself to further criticism that it’s encouraging more U.S. borrowing and a wider federal deficit. “We would be waving a red flag in the face of those who are our most volatile critics,” he said.

By the fall of 2010, job growth remained meager, the unemployment rate was about 9.5% and inflation was feeble. Supporters of another stimulus believed it at least would weaken the dollar, bolstering exports, and drive investments to higher-yielding stocks, making consumers feel wealthier so they’ll spend more. Pumping more money into the banking system and economy also could push up low inflation, which threatened a further downturn if consumers put off purchases on the expectation that prices would remain flat or could even fall.