Minutes: Fed Leaning Toward Reducing Stimulus This Year
Washington (AFP) – Federal Reserve policymakers were still leaning toward reducing U.S. monetary stimulus this year, despite a decision to hold fire in September, the minutes of their last meeting showed Wednesday.
Markets were surprised when the Fed announced, after the September 17-18 meeting, that it would leave unchanged its $85 billion a month in asset purchases, or quantitative easing, after signaling in May it could begin to taper the support later in 2013.
Markets had expected the Federal Open Market Committee would launch a QE taper in September, and interest rates spiked higher in anticipation of tighter credit.
The minutes revealed that the decision to keep up the flow of easy money, given a recent batch of mixed economic data, was “a relatively close call.”
“Most participants viewed their economic projections as broadly consistent with a slowing in the pace of the Committee’s purchases of longer term securities this year and the completion of the program in mid-2014.”
In the debate about whether to trim the flow of asset purchases at the meeting, “a number of members emphasized the contingent and data-dependent nature of the Committee’s purchase program,” the minutes said.
“In light of the mixed data recently, including inflation readings that remained below the Committee’s longer-run objective, and the concerns over near-term fiscal uncertainties, some members indicated that they preferred to await more evidence that their expectation of continuing improvement would be realized.”
Fed officials also appeared worried that their communications strategy with the public may be damaged by the decision to stay the course with stimulus.
“Some participants emphasized a need to clearly communicate the rationale behind any decision not to do so, in order to avoid conveying a message of pessimism regarding the economic outlook or to reinforce the distinction between decisions concerning the pace of purchases and those concerning the federal funds rate,” the minutes said. “It was noted that the postponement of such an announcement to later in the year or beyond could have significant implications for the effectiveness of Committee communications.”
FOMC members also expressed concern about the potential for a September tightening to push up interest rates, pressuring the broad economy and the housing recovery, one of its few bright spots.
“The announcement of a reduction in asset purchases at this meeting might trigger an additional, unwarranted tightening of financial conditions, perhaps because markets would read such an announcement as signaling the Committee’s willingness, notwithstanding mixed recent data, to take an initial step toward exit from its highly accommodative policy.”