Federal Open Market Committee members were presented three options for tending to the System Open Market Account balance sheet at their last meeting, which resulted in Operation Twist, but they were also briefed on a reinvestment maturity-extension program and a large-scale asset purchase program, according to the minutes of its Sept. 20-21 meeting released Wednesday.
Participants deemed “large-scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted,” though some said the eventual plan, the Twist, would be “more likely to raise inflation and inflation expectations than to stimulate economic activity.”
The other options were: the Fed using principal payments from its agency securities to buy long-term Treasuries, or simply buying longer-term Treasuries. Also discussed was cutting the interest rate the Fed pays depository institutions on reserve balances.
As evidenced by the unusually large number of dissents, the minutes said: “Participants expressed a range of views on the potential efficacy of policy tools tied to the size and composition of the Federal Reserve’s balance sheet.”
Participants also worried that a maturity extension program or large-scale asset purchase program could have a negative impact on market functioning.
“Most participants indicated that they favored taking steps to increase further the transparency of monetary policy, including providing more information about the committee’s longer-run policy objectives and about the factors that influence the committee’s policy decisions.”