Fed Chairman Jerome Powell testified at the U.S. Capitol on Tuesday behind a sneeze guard. He spoke to members of a House committee regarding Treasury and Federal Reserve pandemic response.
Photo: Bill O’Leary/Press PoolFederal Reserve officials last month reviewed how to design more support for an economy reeling from the coronavirus pandemic while expressing concerns over the risks of additional virus outbreaks.
The central bank on Wednesday released minutes of its June 9-10 meeting, at which officials signaled they expected to keep rates near zero at least through 2022. They cut rates to near zero in March and have sharply expanded their asset portfolio to stabilize government debt and other lending markets.
Officials are in no hurry to remove that support. The minutes showed they made progress last month toward consensus on a strategy to guide borrowing costs lower by spelling out in greater detail how long they plan to hold rates down. By contrast, the minutes showed officials were nowhere close to agreement on a potentially complementary tool to reinforce that guidance by committing to cap Treasury yields with unlimited purchases of short- or medium-term government securities.
Fed Chairman Jerome Powell opened the meeting by acknowledging national protests sparked by the police killing of George Floyd. He cited the “extraordinary and deeply troubling events” of the preceding two weeks, in which “injustice, prejudice and the callous disregard for life had led to social unrest and a sense of despair,” the minutes said.
Mr. Powell told his colleagues he planned to open his news conference following their meeting with a message to reaffirm the central bank’s “unflinching commitment” to rejecting racism and promoting full participation of all members of society in the economy.
Separately, Fed officials worried at the meeting that prematurely resuming certain commercial activities without proper public-health safeguards or voluntary social distancing could hurt the economy in the months ahead by widening the spread of the virus.
Officials saw “a great deal of uncertainty” about whether a safe reopening could be achieved, the minutes said. They “expressed concerns about the possibility that an early reopening would contribute to a significant increase of infections.”
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Either way, officials believed “highly accommodative monetary policy and sustained support from fiscal policy” would be needed to ensure a durable recovery in jobs.
While employers reported a surprising 2.5 million increase in employment in May, Fed officials didn’t seem particularly enthused about pickups in hiring or spending because around 20 million fewer people were employed compared with February and because of difficulty determining the extent to which temporary federal relief measures, such as enhanced unemployment benefits, had supported incomes.
Officials continued deliberations over the best way to provide more stimulus for the economy now that interest rates have been cut to near zero. The minutes indicated those discussions were likely to continue without any firm resolution at their next meeting, scheduled for July 28-29, setting up a possible resolution and announcement at their following gathering in September.
Officials reviewed how to make more explicit their so-called forward guidance for the path of the benchmark federal-funds rate and their bond purchases. The minutes showed support was broadest for a strategy to condition the removal of stimulus on the economy meeting certain thresholds, particularly related to inflation outcomes.
Several officials supported a strategy in which the Fed temporarily would allow inflation to run modestly above its 2% target to make up for a prior inflation shortfall once the economy recovers from the pandemic. Officials thought this approach would potentially prevent a “premature withdrawal” of Fed stimulus, the minutes said.
Such a strategy would be a significant departure from the practice the Fed has used over the past 30 years to pre-emptively raise interest rates to head off inflationary pressures.
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Fed economists briefed policy makers last month on different strategies to cap yields on Treasury securities by committing to purchase whatever amounts are needed to keep yields at certain levels. The tool has some appeal because it could reinforce officials’ intentions to keep rates low and, if investors believe those commitments are credible, it could provide the same amount of stimulus without requiring as many Fed bond purchases.
Still, the minutes indicated officials were in the early stages of reviewing such plans, with many voicing skepticism. “Nearly all participants indicated that they had many questions regarding the costs and benefits of such an approach,” the minutes said.
Several officials thought that as long as the Fed’s guidance to keep rates low for a long time was credible, the costs of yield caps might not be worth the presumed benefits.
Some saw the tool as less compatible with the threshold-based guidance officials preferred. Others worried such policies could lead the Fed to lose control of its balance sheet or surrender its autonomy to manage policy to fiscal authorities at the Treasury.
Economic research presented at the meeting suggested that, with rates at zero, the use of forward guidance and asset purchases could require the Fed to provide stimulus for “many years to quicken meaningfully the recovery from the current severe downturn.”
The staff briefing warned that those policies wouldn’t be as effective if they weren’t well understood by the public. “Alternatively, prompt and forceful policy actions by the committee might help focus the public’s expectations around better outcomes or reduce perceived risks of worst-case scenarios,” the minutes said.
The Fed cuts rates when economic growth is poor to encourage businesses and households to invest or spend. In the years after the 2008 financial crisis, with short-term rates pinned near zero, the Fed’s other tools worked primarily by driving down long-term rates, which made it easier for households to pay off debts and encouraged new borrowing and risk taking.
Several Fed officials last month voiced concern that those bond-buying tools might be less powerful now because long-term interest rates have declined around the world, leaving less room to influence investor behavior by pushing bond yields lower.
These officials still thought bond buying could support the economy, however, by offsetting potential increases in long-term interest rates or by reinforcing the Fed’s forward guidance.
Write to Nick Timiraos at nick.timiraos@wsj.com
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