It settled on announcing its intention to keep interest rates near zero through mid-2013, but five other possibilities were also discussed
When the Federal Reserve chose to try to stimulate the economy with its words earlier this month, the market wasn't impressed. The Fed attempted to provide investors more certainty on interest rates, saying they would remain near zero through mid-2013. But the market wanted some more tangible action, like another round of asset purchases. In the Fed's detailed August meeting minutes, we get a glimpse of how this and other tools were considered. The discussion provides a preview of how the Fed might intervene if the economy continues to struggle.
Tool #1: The Time-Based Language Tweak (what the Fed chose)
As its August 9th statement indicated, the Federal Reserve intends to leave interest rates near zero not just for a vague extended period, but through mid-2013. By providing this specificity, the Fed hopes to prevent rates from creeping up if some in the market expect them to rise sooner than the Fed might prefer.
But the Fed clarified something key about its intentions here: they aren't written in stone. The minutes say:
Most members, however, agreed that stating a conditional expectation for the level of the federal funds rate through mid-2013 provided useful guidance to the public, with some noting that such an indication did not remove the Committee's flexibility to adjust the policy rate earlier or later if economic conditions do not evolve as the Committee currently expects. (my emphasis)
In some sense, this weakens the impact of this language change. Prior to August 9th, the market knew that interest rates were going to remain very low until the economy picked up and the Fed decided that it was time to raise them. This understanding doesn't appear to have changed. But now we have a timeline for how long the Fed expects that the economy will remain too weak to accommodate an interest rate hike. The Fed does not appear committed to the mid-2013 date if conditions evolve in unexpected ways.