Most Fed Officials Saw QE Tapering This Year, Minutes Show
Most Federal Reserve policy makers said the central bank was likely to taper its bond purchases this year, even as they unexpectedly refrained from such a move in September, minutes of their last meeting show.
“Most participants viewed their economic projections as broadly consistent with a slowing in the pace of the committee’s purchases of longer-term securities this year and the completion of the program in mid-2014,” according to the record of the Federal Open Market Committee’s Sept. 17-18 gathering, released today in Washington.
The minutes show a lengthy debate over whether the economy had improved sufficiently to warrant a reduction in the Fed’s $85 billion in monthly bond buying, with several members saying the decision was “a relatively close call.”
The FOMC, acting before the Oct. 1 partial government shutdown, held off tapering bond purchases and indicated that budget cuts and an increase in borrowing costs were drags on the expansion. Policy makers wanted to see more evidence of steady growth to combat 7.3 percent unemployment, they said in a statement.
“With the markets apparently viewing a cut in purchases as the most likely outcome, it was noted that the postponement of such an announcement to later in the year or beyond could have significant implications for the effectiveness of committee communications,” the minutes said of members who favored reducing purchases.
If the Fed “did not pare back its purchases in these circumstances, it might be difficult to explain a cut in coming months, absent clearly stronger data on the economy and a swift resolution of federal fiscal uncertainties,” according to the minutes.
The yield on the 10-year Treasury note rose three basis points to 2.66 percent as of 5 p.m. in New York, while the Standard & Poor’s 500 Index increased 0.1 percent to 1,656.40.
“Clearly they still want to taper this year and be done in the middle of next year but I don’t know how that’s going to happen now,” said Dan Greenhaus, chief global strategist at BTIG LLC in New York.
“October is off the table, which leaves December, and if the economy acts poorly after the debt ceiling debate then tapering in December will be a hard sell,” he said, referring to FOMC meetings scheduled for Oct. 29-30 and Dec. 17-18. “I don’t think they want to be seen as reducing accommodation amid an increase in fiscal drag and compounding the problem.”
The committee discussed how it could differentiate between signaling plans for its asset purchase program with its commitment to hold down the federal funds rate, the minutes said. The FOMC has pledged to keep the benchmark interest rate near zero as long as unemployment exceeds 6.5 percent and the outlook for inflation doesn’t go above 2.5 percent.
The panel considered saying it “would not raise its target for the federal funds rate if the inflation rate was expected to run below a given level,” and providing “additional information” about their intentions for the benchmark lending rate once the 6.5 percent unemployment threshold was reached, according to the minutes.
Fed officials who favored maintaining the pace of purchases cited concerns about the effects on the economy from “the tightening in financial conditions in recent months, as well as about the considerable risks surrounding fiscal policy” and viewed recent economic data as “having been on the disappointing side.”
Economists had forecast the FOMC would dial down monthly Treasury purchases by $5 billion, to $40 billion, while maintaining its buying of mortgage-backed securities at $40 billion, according to a Bloomberg survey.
The minutes also show debate over the strategy for winding down purchases, with some members favoring a reduction only in Treasuries.
“A few participants expressed a preference for not cutting MBS purchases but reducing purchases only of Treasury securities initially, with the intent of continuing to support the recovery in the housing sector,” the record showed. “However, the appeal of including both types of securities in any reduction was also mentioned.”
The decision to forgo a reduction surprised financial markets. The day of the FOMC statement, the Standard & Poor’s 500 Index (SPX) climbed 1.2 percent to 1,725.52, while the yield on the 10-year Treasury note dropped 0.16 percentage point to 2.69 percent. Oil rose more than 2.5 percent.
The FOMC’s December meeting will be followed by Chairman Ben S. Bernanke’s final scheduled press conference.
The Fed is set to have a new chairman after the end of Bernanke’s term in January as President Barack Obama nominated Vice Chairman Janet Yellen today as Bernanke’s successor. Yellen, a key architect of record stimulus, would be the first female leader in the central bank’s 100-year history.
Atlanta Fed President Dennis Lockhart said on Oct. 3 the central bank’s decision was “wise” given the subsequent partial government shutdown.
“We avoided a potentially very awkward situation of reducing stimulus just on the eve of what now has developed,” Lockhart told reporters at a conference in Atlanta. The decision to delay a reduction in bond purchases “now is vindicated by the developments.”
The government shutdown may shave as much as 0.1 percentage point from economic growth in its first week, according to the median estimate of 40 economists in a Bloomberg survey, with costs accelerating if the closing persists.
The shutdown stretched into its second week and the U.S. Treasury is moving closer to exhausting its borrowing authority and risking a default as Congress has not agreed to raise the U.S. debt limit.
Obama yesterday offered the possible contours of a resolution, saying he could accept a short-term deal to fund the government and raise the debt ceiling while he negotiates with Republican leaders over fiscal policy and his signature health-care law.
The U.S. economy will probably expand 1.6 percent this year and 2.6 percent in 2014, each 0.1 percentage point less than forecast in July, the International Monetary Fund said yesterday. A U.S. default after the Oct. 17 deadline for raising the debt ceiling could “seriously damage” the world economy, the IMF said.
“The uncertainties, not to mention the outcomes themselves, threaten to have a collateral impact on the rest of the economy,” he said.
Lockheed Martin Corp. (LMT), the top federal contractor, has furloughed 2,400 employees, most of them tied to nondefense programs. They are unable to work because civilian government sites are closed or because the Bethesda, Maryland-based company has received an order to stop work from agencies, Lockheed said in a statement.
The lack of funding authority for the government means the Department of Labor and Department of Commerce won’t produce some of the reports that Fed policy makers use in assessing whether bond buying and near-zero interest rate policies are boosting growth. The Fed uses data from the agencies to gauge unemployment, inflation and economic growth.
The Labor Department postponed its planned Oct. 4 release of its payrolls report for September.
U.S. companies created 169,000 jobs in August, fewer than economists projected, and the unemployment rate fell as workers left the labor force. August and July were the weakest back-to-back months for payroll gains in a year.
The government shutdown “pushes further into the future the time we can get a real assessment of where the economy is,” Rosengren said Oct. 2. “It is going to be much harder to get a gauge of what’s happening in the economy if we don’t have” government statistics produced by agencies that are closed.
Philadelphia Fed President Charles Plosser said yesterday the Fed is “not really flying blind” without official data as long as the government suspension doesn’t drag on. Policy makers can gather anecdotal economic data and receive reports from private firms, he said.
In a press conference after the FOMC meeting last month, Bernanke expressed concern about the risks from a rise in bond yields since May, when he said the committee may dial down the pace of asset purchases in its “next few meetings.”
The yield on the 10-year Treasury note climbed almost 1 percentage point through yesterday since Bernanke’s May 22 comments, with yields on Sept. 6 exceeding 3 percent on an intraday basis for the first time since July 2011. That compares with 1.61 percent on May 1, and a record-low 1.38 percent in July 2012.
The FOMC said in its statement last month the increase in interest rates “if sustained, could slow the pace of improvement in the economy and labor market.”
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