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Fri, Jan 08, 2010 - Page 10 News List

FOMC debates asset purchase, inflation

‘EXTRAORDINARY’ STIMULUS While some Fed officials favored expanding asset buying beyond the first quarter, others cautioned it could lead to faster inflation

BLOOMBERG

US Federal Reserve officials last month debated increasing and extending asset purchases should the economy weaken, with a few favoring the move and one seeking a reduction, minutes of their last meeting showed.

Policymakers also differed over whether risks are greater that inflation would speed up or slow down too much, the Fed’s Open Market Committee (FOMC) said on Wednesday in minutes of its Dec. 15 to Dec. 16 meeting in Washington.

Some officials said a “quite elevated” slack in the economy would dampen prices, while others saw a risk of faster inflation from the Fed’s “extraordinary” stimulus, the central bank said.

US Federal Reserve Chairman Ben Bernanke and his colleagues are trying to withdraw unprecedented stimulus and emergency lending programs without impeding efforts to sustain a recovery and reduce unemployment, which is now close to a 26-year high.

“To keep inflation expectations anchored, all participants agreed that monetary policy would need to be responsive to any significant improvement or worsening in the economic outlook and that the Federal Reserve would need to continue to clearly communicate its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and place,” the minutes said.

Policymakers in the Dec. 16 statement following their meeting said the labor market was stabilizing, while keeping a pledge to keep interest rates “exceptionally low” for an “extended period.”

The Fed said most lending programs would expire as scheduled on Feb. 1 because of “improvements in the functioning of financial markets.”

The FOMC, in a unanimous decision, left its target for the benchmark interest rate unchanged in a range of zero to 0.25 percent. Fed policymakers next meet on Jan. 26 to Jan. 27 in Washington.

“A few members noted that resource slack was expected to diminish only slowly and observed that it might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the committee’s large-scale asset purchases and continuing them beyond the first quarter,” especially if the economic outlook or mortgage market deteriorated, the minutes said.

One member said the Fed could reduce planned asset purchases because of improvement in financial markets and the economy, and “that it might become appropriate” to start reducing asset holdings “if the recovery gains strength over time,” the report said.

The Fed is buying US$1.25 trillion in mortgage-backed securities issued by housing-finance companies Fannie Mae, Freddie Mac and federal agency Ginnie Mae. The central bank began the program in January last year.

The Fed separately purchased US$300 billion in US Treasury securities from March through September and is buying, through March, US$175 billion in corporate debt issued by government-backed Fannie and Freddie and the government-chartered Federal Home Loan Banks.

Some officials said there was a risk that the end of Fed purchases and federal homebuyer tax credits could “undercut” improvements in the housing market, the minutes said.

Under Bernanke, the Fed has cut interest rates almost to zero and pumped more than US$1 trillion into the financial system to battle the worst recession since World War II.

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