Federal Reserve policy makers said that improvements in the economy didn’t meet the threshold for scaling back their plans to purchase $600 billion in bonds.
“While the economic outlook was seen as improving, members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program, and some noted that more time was needed to accumulate information on the economy before considering any adjustment,” the Fed said in minutes of its Dec. 14 policy meeting, released today in Washington.
The minutes show that with growth picking up since the easing program began, Fed officials remain focused on an inflation rate that is lower than the roughly 2 percent that the central bank prefers and an unemployment rate that will fall slowly, averaging 9.4 percent this year according to a Bloomberg survey.
“There’s very little chance that they’re going to cut the program short, short of an absolute shocker on economic” data, said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “The bottom line is they only expect slow progress toward their goals.”
During the meeting, Fed officials affirmed their pledge to purchase $600 billion in Treasury securities through June. The gathering marked the two-year anniversary of near-zero interest rates, as the central bank reiterated its plan to keep rates “exceptionally low” for an “extended period.”
Contingent on Economy
The Fed’s Open Market Committee “emphasized that the pace and overall size of the purchase program would be contingent on economic and financial developments,” according to the minutes. “However, some indicated that they had a fairly high threshold for making changes to the program,” the minutes added.
Since Fed Chairman Ben S. Bernanke and his colleagues announced the so-called quantitative easing policy on Nov. 3, financing conditions have eased for companies, U.S. stocks have increased, expectations for inflation have risen and the dollar has gained strength.
The premium that investment-grade companies pay to borrow above government debt narrowed to 1.66 percentage points yesterday from 1.78 percentage points on Nov. 3, according to Bank of America Merrill Lynch index data.
The extra yield, or spread, investors demand to own high-yield, high-risk securities instead of government debt declined to 5.32 percentage points yesterday from 6.81 percentage points on Aug. 27, when Bernanke signaled his willingness for a second round of easing in a speech in Jackson Hole, Wyoming, according to Bank of America Merrill Lynch index data. Since Bernanke’s speech the Standard & Poor’s 500 Index has increased by 19.5 percent, closing yesterday at 1,271.87.
Stocks Trim Losses
Stocks trimmed losses today after the minutes were released. The S&P 500 fell 0.3 percent to 1,268.50 at 2:56 p.m. in New York trading after falling as much as 0.7 percent earlier.
Investors expect prices to rise by 2.3 percent annually over the next 10 years, as measured by the spread between nominal and inflation-indexed Treasury bonds, compared to expectations of 1.6 percent inflation on the day of Bernanke’s speech.
Despite concerns among Republican lawmakers that the Fed’s policy will weaken the dollar, the U.S. currency has strengthened 3.8 percent since Nov. 3 against a basket of six other currencies, as of 2:37 p.m. in New York. Against the euro, the dollar has risen 6.2 percent. Since Bernanke’s August speech the dollar has fallen 4.2 percent against a basket of six other currencies.
Bernanke began a second round of asset purchases after the Fed bought $1.7 trillion in mortgage debt and Treasuries through March 2010. The stimulus helped pull the U.S. out of the worst recession in seven decades without reducing an unemployment rate close to a 26-year high.
The announcement of the stimulus hasn’t coincided with a decline in interest rates on longer-term Treasury debt.
The yield on the 10-year Treasury closed at 3.47 percent on the day of the Dec. 14 meeting, an increase from 2.57 percent when the second round of quantitative easing was announced on Nov. 3. The 10-year yield has since fallen to 3.35 percent as of 2:36 p.m. in New York. The 30-year Treasury bond rose to 4.53 percent from 4.04 percent at the previous meeting. It has since fallen to 4.43 percent.
Fed officials said at the meeting that Treasury yields climbed because of “an apparent downward reassessment by investors of the likely ultimate size of the Federal Reserve’s asset-purchase program, economic data that were seen as suggesting an improved economic outlook, and the announcement of a package of fiscal measures that was expected to bolster economic growth and increase the deficit,” the minutes said.
Some participants also said because the bond market’s moves “reflect changes in investors’ expectations” about quantitative easing, the yield changes underscore the central bank’s purchases are keeping interest rates lower than they otherwise would be, according to the minutes.
A strengthening economy would reduce the risk of deflation and increase bond yields. Last week the Labor Department reported that 388,000 people filed initial jobless claims, the least since July 2008.
The index of leading economic indicators for November showed improvement in nine of 10 components designed to gauge the outlook for growth in the next three to six months. That was the broadest advance in seven years, the New York-based Conference Board said on Dec. 17.
The FOMC said in its Dec. 14 statement that “the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment.”
Unemployment May Fall
On Dec. 3 the Labor Department reported that the economy added only 39,000 jobs in November and the unemployment rate rose to 9.8 percent. The department on Jan. 7 will report that the unemployment rate fell to 9.7 percent in December and the economy added 140,000 jobs, according to the median estimate of a Bloomberg Survey.
Most participants said they expected “underlying measures of inflation would bottom out around current levels and then move gradually higher as the recovery progresses.” The minutes also noted that “several participants saw the risk of deflation as having receded somewhat over recent months.”
The rate of inflation slowed throughout 2010. The personal consumption expenditures index, excluding food and energy, increased 0.8 percent in November from a year earlier, down from 1.8 percent in December 2009. Including all items, inflation was 1 percent, down from 2.4 percent at the end of 2009.
Both rates show inflation running below the Fed’s preferred target for price stability, which Bernanke has identified as annual inflation of “2 percent or a bit below.”
The second round of quantitative easing, dubbed QE2 by investors and economists, has been criticized by Republican politicians as well as officials in China, Germany and Brazil, who say it may weaken the dollar and risks igniting inflation. John Boehner, nominated to be House speaker, and three other Republicans voiced “deep concerns” in a Nov. 17 letter to Bernanke about a policy that they said may undermine the dollar and create asset price bubbles.
Representative Ron Paul of Texas, author of the book, “End the Fed,” is set to chair a House subcommittee overseeing the central bank. The House Oversight Committee will be led by California Republican Darrell Issa, who aims to promote greater openness by the Fed, including a reduction in the five-year delay on releasing FOMC transcripts.
Bernanke defended the Fed on CBS Corp.’s “60 Minutes” program last month, saying fears of inflation are “overstated.” He said he was “100 percent” confident the central bank can control inflation and eventually withdraw its stimulus.
Bernanke also said that expanding the purchases beyond $600 billion is “certainly possible.”
Fed policy makers “generally expected that progress was likely to remain modest, with unemployment and inflation deviating from the Committees’ objectives for some time,” according to the minutes.
“Several meeting participants mentioned the communications challenges faced in conducting effective policy, including the need to clearly convey the Committee’s views while appropriately airing individual perspectives,” the minutes said.
Vice Chairman Yellen
At the Nov. 2-3 FOMC meeting, Vice Chairman Janet Yellen was made the head of a subcommittee to review the FOMC’s “communication guidelines with the aim of ensuring that the public is well informed about monetary policy issues while preserving the necessary confidentiality of policy discussions until their scheduled release.”
Kansas City Fed President Thomas Hoenig, the longest-serving policy maker, voted against the FOMC decision for the eighth straight time, reiterating his view that the “continued high level of monetary accommodation” may eventually “destabilize the economy.” Hoenig tied former Governor Henry Wallich’s record in 1980 for most dissents in one year.
Hoenig said that the Fed’s statement “should indicate that sufficient monetary stimulus was in place to support the recovery.”
Fed presidents rotate voting on monetary policy. In 2011, Chicago Fed President Charles Evans, Richard Fisher of the Dallas Fed, Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis will rotate onto the committee. As president of the New York Fed, William Dudley has a permanent vote. Hoenig doesn’t have a vote this year.
Former Fed governor Lyle Gramley said in an interview on Bloomberg Television last week that Plosser and Fisher may pick up where Hoenig left off, casting dissents against the FOMC’s decisions.