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The Federal Reserve is likely to deliver another round of monetary stimulus "fairly soon" unless the economy improves considerably, minutes released on Wednesday from the U.S. central bank's August meeting suggested.
While the meeting was held before a recent improvement in economic data, including a stronger-than-expected July reading for U.S. employment, policymakers were pretty categorical about their dissatisfaction with the current outlook.
"Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery," the Fed said in minutes to its July 31-Aug. 1 meeting.
Wall Street stocks briefly pared losses after the report was released while Treasury bond prices, which have been under recent pressure from better economic figures, extended the day's gains. The euro surged to a seven-week high against the dollar.
"Certainly these minutes are dovish and will revive hopes for increased Fed easing," said David Sloan, economist at 4Cast Ltd. "We have seen some improvement in the data recently but whether it is enough to qualify as a significant upturn is unclear."
Some officials raised concerns about a large Fed presence in the markets for Treasury and mortgage-backed securities, but others agreed with staff analysis showing "substantial capacity" for buying new assets.
The Fed held policy steady at that gathering, but signaled a renewed readiness to act amid lingering softness in the economy. The minutes showed the central bank is actively considering a "flexible" bond-buying program, which could suggest that no upfront amount will be announced.
Fed officials saw significant risks to an already weak U.S. economy, which grew at a sluggish 1.5 percent annual rate in the second quarter. The risks include a worsening of Europe's financial strains and the looming U.S. budget cuts and tax hikes, which have become commonly known as a fiscal cliff.
Many Fed officials supported pushing back the likely timing of an eventual interest rate hike, which the Fed currently sets at late 2014. But they decided to defer the decision to the Fed's Sept. 12-13 meeting, when the central bank will release a new round of economic forecasts.
A few central bankers thought it might be a good idea to replace such language with guidance directly linked to economic factors, as has been proposed by Chicago Fed President Charles Evans.
Officials also actively debated and tested the possibility of developing a consensus Fed forecast.
A couple of policymakers favored lowering the rate the Fed pays banks to park their excess reserves at the central bank, currently at 0.25 percent. But several participants worried that money market funds could run into trouble if their returns are crimped further.
Officials noted the European Central Bank's recent decision to lower its deposit rate to zero offered a chance to learn about possible effects. Similarly, a couple of officials broached the possibility of developing a loan incentive program like the Bank of England's recently minted funding-for-lending program.
U.S. employment growth slowed sharply in the second quarter, but picked up again in July. The economy created 163,000 jobs last month, though the unemployment rate, which is culled from a separate survey, rose to 8.3 percent from 8.2 percent.