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Fed policymakers increasingly divided over monetary stimulus

February 20, 2013|By Don Lee
  • Federal Reserve Chairman Ben S. Bernanke at a meeting of Group of 20 finance ministers and central bankers in Moscow last week.
Federal Reserve Chairman Ben S. Bernanke at a meeting of Group of 20 finance… (Yuri Kadobnov / AFP/Getty…)

WASHINGTON -- An increasing number of top Federal Reserve officials are worried about the downside of their economic stimulus efforts, raising the possibility that the central bank could curb its monthly bond purchases sooner than financial markets are expecting.

Fed policymakers met at the end of last month and decided to keep buying $85 billion of Treasury and mortgage-backed bonds a month. The program is aimed at pushing down long-term interest rates to spur investment and economic growth and help lower the nation’s high unemployment rate.

But minutes of that Jan. 29 to 30 meeting, released Wednesday with the usual three-week lag, indicated that “many” of the Fed policymakers were concerned about the potential costs and risks of the bond purchases, namely higher inflation and the threat of destabilizing financial markets and exposing the central bank to significant losses.

Some analysts interpreted “many” as meaning a majority of the policymakers. In contrast, minutes from the central bank’s December meeting indicated that only “several” officials expressed a desire to slow or stop the bond purchases well before the end of 2013.

The Fed’s public statement in late January said that it would continue the bond purchases until the labor market improved substantially, which many analysts and investors don’t see happening until 2014.

Even so, the latest minutes also make clear that “most” Fed officials feel that the bond purchases “had been effective in easing financial conditions and helping stimulate economic activity.”  And with Chairman Ben S. Bernanke and the Fed’s vice chairwoman, Janet Yellen, having publicly expressed strong concerns about the dangers of high unemployment, analysts said the central bank was unlikely to make a premature exit from its easy-money policies.

“Although concerns about the costs of [the Fed’s] balance sheet expansion are rising, the committee judged that ‘the recovery in the labor market was far from complete,’” Michael Gapen, an economist at Barclays Bank, said in a note to clients. “We maintain our expectation that the Fed will conduct asset purchases through the end of 2013, with some tapering in the pace in the second half of the year.”

Gapen said, however, that the threat of budget cuts could extend the bond purchases.

With the debate over asset purchases intensifying, Fed officials instructed their staff to do a review of the bond-buying program ahead of future meetings. The Fed’s next policymaking meeting is March 19 to 20.


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