US Federal Reserve officials signaled they may taper their US$85 billion in monthly bond buying “in coming months” if the economy improves as anticipated.
Policymakers “generally expected that the data would prove consistent with the committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months,” according to the record of the Federal Open Market Committee’s Oct. 29-30 meeting, released on Wednesday in Washington.
“It sounds like they’re moving closer to tapering” bond buying, New York-based UBS Securities LLC economist Sam Coffin said. “There’s a lot more focus on their forward guidance and a lot of that is because if they’re moving closer to tapering, they want to signal they’ll stay easy after the tapering has begun.”
The committee’s minutes show extensive discussion on how to increase the clarity of their plans to hold interest rates near zero. They made no decisions on those plans.
“There’s still a ton of ideas, but it doesn’t seem like the committee is coalescing around a single path of action just yet,” said Stamford, Connecticut-based Pierpont Securities LLC chief economist Stephen Stanley, a former Richmond Fed researcher.
In Europe, where policymakers are confronted with a Japan-like threat of deflation, officials are considering a new tool — a negative interest rate for commercial lenders who park excess cash at the European Central Bank (ECB).
The ECB is discussing a cut of less than the typical quarter percentage point magnitude, two people with knowledge of the debate say.
Most participants said lowering the rate “could be worth considering at some stage, although the benefits of such a step were generally seen as likely to be small, except possibly as a signal of policy intentions,” the minutes said.
Officials debated how to clarify or strengthen their communication about the economic thresholds guiding how long interest rates will stay low. The committee has said it will hold rates near zero at least as long as unemployment remains above 6.5 percent and the outlook for inflation is subdued.
A couple of committee members supported reducing the threshold below its current level of 6.5 percent, while others said such a move may raise concerns about the Fed’s commitment to the thresholds.
Several said it “could be more helpful” to better explain their intentions for the federal funds rate after the jobless rate falls to 6.5 percent, the minutes said.
Fed Chairman Ben Bernanke said on Tuesday that the Fed will probably hold down its main interest rate long after ending its bond buying, and possibly after unemployment falls below 6.5 percent.
St Louis Fed President James Bullard has proposed adding an “inflation floor” as part of policy guidance, specifying that the Fed would not raise interest rates with inflation below 1.5 percent.
“You have to take the inflation target seriously, defend the target from the low level,” Bullard said in an interview on Wednesday in Chicago. “I continue to be concerned about this issue.”
The minutes said “in general” the benefits of that proposal were viewed as “uncertain and likely to be rather modest.”
The committee has pledged to press on with so-called quantitative easing until seeing substantial improvement in the outlook for the labor market. Employers added 204,000 workers to payrolls last month, more than forecast by economists, and the unemployment rate has fallen to 7.3 percent from the 8.1 percent rate the month before the central bank began a third round of bond buying in September last year.
Policymakers said they still expect a pick-up in the pace of economic activity even as reports suggest growth in the second half of this year may prove to be “somewhat weaker than many of them had previously anticipated,” the minutes said.
While they saw less risk for the economy, they also said “several significant risks remained,” specifically citing fiscal drag and budget standoffs.