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Federal Reserve minutes expose rift on when to end stimulus

January 03, 2013|By Don Lee

WASHINGTON -- Despite maintaining aggressive stimulus measures last month to support the recovery and bring down high unemployment, Federal Reserve policymakers were divided on when they might end their hefty bond-buying programs, according to an account of the central bank’s meeting released Thursday.

The split suggests that the Fed could halt its asset purchases sooner than many investors are expecting, which could jolt financial markets. 

Fed officials said last month that they would keep buying $85 billion of Treasury and mortgage-backed securities each month in an effort to hold down long-term interest rates and to spur investing, spending and hiring. Policymakers didn’t specify how long they would continue the purchases, even as they announced plans not to raise short-term interest rates until the unemployment rate fell below 6.5%, something that’s not expected to happen until mid-2015 at the earliest.

The unemployment figure for December will be reported Friday by the government, along with payroll-growth numbers. Analysts on average are predicting that the jobless rate will remain at 7.7% with job growth coming in around 150,000.

Some analysts had suggested that the Fed’s current asset purchases could continue into 2014, but the minutes of the central bank’s Dec. 11-12 meeting, released with the usual three-week lag, indicates that some members wanted to halt the asset purchases right away. Other policymakers were split between preferring to end the bond-buying around the middle of 2013 and extending the stimulus longer. 

The varying views reflect a range of assessments on the economy as well as differences in the level of concern about the effectiveness of the stimulus and the inflation and bubble risks of the Fed’s programs, which if continued until year-end would add about $1 trillion to the central bank’s already bloated portfolio.

“While almost all members thought that the asset purchase program begun in September had been effective and supportive of growth,” the minutes said, “they also generally saw that the benefits of ongoing purchases were uncertain and that the potential costs could rise as the size of the balance sheet increased.”

Since September, the Fed has said that it would continue its bond purchases until the labor market “improved substantially.” But officials haven’t made clear what that means.

The Fed said last month that the economy grew at a “moderate pace” over the second half of last year, and the central bank’s December forecast sees the economy advancing at a somewhat faster rate in 2013 – although the range of views on the short-term economic outlook widened compared to the Fed’s September forecast.

“The disagreement between FOMC members on how long to continue asset purchases primarily reflects the considerable degree of uncertainty on the economic outlook over the next year,” James Marple, senior economist at TD Bank, said in comments on the minutes Thursday.

“The Fed would like to move away from asset purchases and instead allow expectations about economic growth and therefore future short-term interest rates to influence long-term interest rates," he wrote. "However, until they see signs that the labor market is showing substantial improvement they are likely to continue to hold their nose and make them. Given the outlook for economic growth of between 2% and 3%, the Fed will be hard pressed to cut short their purchase program before late 2013.”

ALSO:

Fed to tie interest rate to job gains

Freddie Mac survey: mortgage rates hover near record lows

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