Many on Fed Awaiting More Job Gains Before Tapering QE: Economy
Many Federal Reserve officials want to see more signs employment is picking up before they’ll begin scaling back $85 billion in monthly bond purchases, according to minutes of policy makers’ meeting last month.
“Many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases,” according to the record of the Federal Open Market Committee’s June 18-19 gathering released today in Washington.
Today’s minutes said “several members judged that a reduction in asset purchases would likely soon be warranted.” Those members said the “cumulative decline in unemployment since the September meeting and ongoing increases in private payrolls” had increased their confidence the labor market had improved, according to the minutes.
Chairman Ben S. Bernanke said in a press conference after the meeting that the Fed may trim its bond-buying program this year and halt it around mid-2014 if economic performance tracks the central bank’s forecast. The minutes show officials want to see that forecast confirmed before tapering purchases.
Reducing the pace of bond buying in September “looks to be the majority opinion but it is not a done deal,” said Eric Green, global head of rates and foreign-exchange research at TD Securities Inc. in New York and a former New York Fed economist. “Most of them want to see more evidence the job market is improving. The only way for the job market to improve is if growth shifts higher from the pace of the first half.”
Not all FOMC members agree on when to begin slowing the pace of purchases. Some on the panel “need to see more evidence that the projected acceleration in economic activity would occur, before reducing the pace of asset purchases,” according to the minutes.
U.S. stocks were little changed, with the Standard & Poor’s 500 Index falling 0.2 percent to 1,648.24 at 2:51 p.m. in New York. The yield on the 10-year Treasury note rose to 2.68 percent from 2.63 percent yesterday.
In Europe earlier today, reports showed French industrial production fell in May less than economists forecast and Italian output rose for the first time since January in what European Central Bank Governing Council member Christian Noyer called “encouraging signs” of recovery.
“We have seen a certain number of positive signals” in the recent data, Noyer told journalists in Paris. The recovery “still must be confirmed” and governments need to “accelerate the pace of reforms,” he said.
The Stoxx Europe 600 Index finished little changed at its highest level in a month.
The Fed minutes refer to the 12 voting policy makers as “members” and the entire 19-person policy making group as “participants.” Only five of the 12 regional Fed presidents have a vote in any given year.
In a discussion about the appropriate path of the balance sheet among the 19 FOMC participants, “about half” indicated “it likely would be appropriate to end asset purchases late this year,” the minutes said. “Many other participants anticipated that it likely would be appropriate to continue purchases into 2014,” the minutes said, while “a few” wanted to slow or stop the purchases at the June meeting.
St. Louis Fed President James Bullard dissented from the Fed’s statement in June, saying that in light of low readings on inflation the committee should “signal more strongly its willingness to defend its goal of 2 percent inflation.”
The minutes show that “many others worried about the low level of inflation, and a number indicated that they would be watching closely for signs that the shift down in inflation might persist or that inflation expectations were persistently moving lower.”
Fed officials speaking since the meeting have sought to clarify Bernanke’s June 19 remarks after his timetable for slowing the pace for unprecedented stimulus triggered a surge in interest rates. The yield on the 10-year Treasury climbed to 2.74 percent on July 5 from 2.19 percent the day before Bernanke spoke, while the national average for the 30-year fixed-rate mortgage rose to as high as 4.46 percent on June 27 from as low as 3.35 percent in May.
Federal Reserve Bank of New York President William C. Dudley said on June 27 that the central bank may prolong its asset-purchase program if the economy falls short of policy makers’ expectations. Fed Governor Jerome Powell and Atlanta Fed President Dennis Lockhart, speaking on the same day, sought to damp expectations the central bank will increase the target interest rate sooner than previously forecast.
Bernanke has an opportunity to clarify his approach to bond buying in a speech scheduled for 4:10 p.m. today in Boston and titled, “A Century of U.S. Central Banking: Goals, Frameworks, Accountability.”
The 59-year-old Fed chief has engineered several unorthodox programs to revive credit and economic growth amid the worst recession since the Great Depression. The Fed cut its target interest rate to near zero in December 2008 and has pledged to hold it there as long as the unemployment rate remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.
The Fed began purchasing $40 billion a month of mortgage backed securities in September and announced $45 billion a month of Treasury purchases in December. The program, known as QE3 for the Fed’s third round of quantitative easing, has expanded the central bank’s balance sheet to a record $3.49 trillion.
The meeting minutes showed Fed officials discussed their strategy for eventually paring the size of their record balance sheet. While “most” anticipated “that the committee would not sell agency mortgage-backed securities,” the participants agreed that the committee’s focus continued to be on stimulus and so decided to defer further discussion on exit, the minutes said.
Fed officials met before the Labor Department’s jobs report for the month of June exceeded expectations, with the economy adding 195,000 jobs and the unemployment rate unchanged at 7.6 percent.
The July 5 report reinforced speculation the Fed may reduce its pace of purchases as soon as September. Economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co. said after release of the employment data that the Fed will begin tapering its purchases sooner than they had projected.
“The June employment report was a step toward the improvement that some of these Fed officials were seeking,” said Dana Saporta, an economist at Credit Suisse Group AG in New York.
Bernanke said tapering depends on whether the economy strengthens in the second half of 2013 and aligns with central bank forecasts released at the end of the June FOMC meeting. The predictions are sunnier than those of Wall Street.
Fed officials predict the economy will grow 2.3 percent to 2.6 percent this year and 3 percent to 3.5 percent in 2014, while the median estimate of economists in a Bloomberg survey is for 1.9 percent growth in 2013 and 2.7 percent in 2014.
Tax increases and automatic federal budget cuts are inhibiting growth this year. Those cuts led to furloughs of the U.S. military’s civilian workers that began this week. The move means a reduction equivalent to 11 days pay for as many as 651,542 employees through Sept. 30, according to Pentagon figures. The furloughs are the latest step in automatic budget cuts, known as sequestration.
Growth in the U.S. was less than originally estimated in the first quarter of the year after an increase in the U.S. payroll tax took a bigger bite out of consumer spending than previously calculated in Department of Commerce reports. The economy grew 1.8 percent in the first quarter, down from a prior reading of 2.4 percent, according to a June 26 report.
At the same time, policy makers including Bernanke and Dudley have remarked about how a housing rebound is aiding the expansion. Home values in 20 U.S. cities rose 12.1 percent in the year through April, the biggest annual gain since 2006, according to an S&P/Case-Shiller index. Sales of new houses in May climbed to the highest level in almost five years.
The housing recovery will probably continue even as mortgage rates rise, Jeffrey Mezger, the president of KB Home (KBH), the best-performing U.S. homebuilder stock this year, said in a June 27 earnings call.
“If the economy continues to expand like it is, I think you’ll see the banks loosen up,” Mezger said. “And so if rates go up a little bit, but underwriting loosens up a bit, I think you’ll see similar demand, if not more. That’s why we’re not troubled by a little uptick in interest rates right now.”
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