US Fed signals possible slowing of QE

POLICY DEBATE::Minutes of the last FOMC meeting showed differences on reducing asset purchases and said a review of quantitative easing would take place next month


Fri, Feb 22, 2013 - Page 15

The US Federal Reserve signaled it may consider slowing the pace of asset purchases as officials extended a debate over whether record monetary easing risks unleashing inflation or fueling asset-price bubbles.

Several participants at the Federal Open Market Committee’s (FOMC) Jan. 29 and Jan. 30 meeting “emphasized that the committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved,” according to the minutes of the gathering released on Wednesday.

Stocks fell on Wednesday, along with oil and gold, on bets the central bank will curb stimulus earlier than expected, even as several Fed officials warned against a premature end to US$85 billion in monthly bond buying.

A gradual reduction in purchases may win the FOMC’s support because it gives policy makers flexibility, said Michael Hanson, senior US economist at Bank of America Corp in New York.

The minutes show “tapering is a likely outcome at some point in the future,” said Hanson, a former Fed economist.

“If you taper the purchases, it allows you to calibrate how the market reacts to your actions without having to go cold turkey,” he said.

At the meeting in December last year, Fed officials were “approximately evenly divided” between those favoring a middle-of-this-year end to purchases and those advocating a later date, according to minutes from the gathering. Fed Chairman Ben Bernanke has pledged to buy bonds until there is a “substantial” improvement in a labor market burdened by 7.9 percent unemployment.

The minutes did not indicate a discussion about when to end quantitative easing.

“They’re changing the debate toward when to scale it down rather than debating the point where it suddenly ends,” said Jim O’Sullivan, chief US economist at High Frequency Economics in Valhalla, New York. “With the economy looking more solid than they feared a few months ago, financial-sector risks take on more importance.”

The Standard & Poor’s 500 Index fell more on Wednesday than in any trading session since November last year, declining 1.2 percent to 1,511.95. The index is up 6 percent this year. The yield on the 10-year Treasury note fell to 2.01 percent from 2.03 percent on Feb. 19.

The FOMC at its meeting last month decided to continue buying US$45 billion a month of Treasuries and US$40 billion in mortgage debt without setting a limit on the duration or total size of the purchases. Policymakers also affirmed their pledge to keep the target interest rate near zero “at least as long” as unemployment remains above 6.5 percent and inflation is projected to be no more than 2.5 percent.

A number of officials said that their evaluation of costs and benefits of the policy “might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred,” according to the minutes.

“Several others argued that the potential costs of reducing or ending asset purchases too soon were also significant, or that asset purchases should continue until a substantial improvement in the labor-market outlook had occurred,” the minutes showed.

The minutes said that the committee would conduct a review of quantitative easing at the March 19 and March 20 meeting.

Fed officials are also considering new ways to present economic projections in their public communications.

Many participants expressed interest in using their quarterly projections to convey information about future asset purchases and the Fed’s balance sheet.

Fed has pushed the benchmark interest rate close to zero and expanded its balance sheet to more than US$3 trillion.

The minutes said “many participants” expressed concern about “potential costs and risks arising from further asset purchases.”

Several members discussed “possible complications” that additional purchases could have as the Fed begins to exit the policy, a few mentioned inflation risks and some mentioned risks to financial stability.