Fed QE Taper Likely in Coming Months on Data, Minutes Say
Federal Reserve officials signaled they may taper their $85 billion in monthly bond buying “in coming months” if the economy improves as anticipated.
Policy makers “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 gathering, released yesterday in Washington.
Stocks and bonds fell at the prospect the FOMC may reduce asset purchases sooner than expected. The Standard & Poor’s 500 Index fell 0.4 percent to 1,781.37, while the yield on the 10-year Treasury climbed 0.09 percentage point to 2.8 percent in New York trading yesterday, the highest since Sept. 17.
“It sounds like they’re moving closer to tapering” bond buying, said Sam Coffin, an economist at UBS Securities LLC in New York. “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 FOMC 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 Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, and a former Richmond Fed researcher.
As the Fed moves closer to scaling back stimulus, central bankers in Japan and Europe are under pressure to combat deflationary risks.
The Bank of Japan will probably have to postpone its original 2015 timeframe for achieving 2 percent inflation, according to 22 of 37 economists surveyed by Bloomberg News. The BOJ today stuck with a pledge to expand the monetary base by 60 trillion yen ($595 billion) to 70 trillion yen a year.
In Europe, where policy makers 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. The ECB is discussing a cut of less than the typical quarter percentage point magnitude, two people with knowledge of the debate say.
Pacific Investment Management Co. predicts 10-year Treasury yields will be capped near 3 percent into 2015 even with the Fed beginning to trim asset purchases as early as January, Executive Vice President Tony Crescenzi said in an interview in Sydney.
The Fed minutes show policy makers discussed whether to cut the interest rate the Fed pays on excess reserves, currently 0.25 percent. Janet Yellen, the vice chairman and the nominee to replace Chairman Ben S. Bernanke, whose term expires in January, told lawmakers last week doing so “certainly is a possibility” even as some Fed officials have been concerned that lowering the rate would damage the functioning of the money market.
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,” according to the minutes.
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 FOMC 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.
Bernanke said Nov. 19 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 yesterday 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 indecisive discussion leaves the Fed’s strategy unclear, said Brian Jacobsen, who helps oversee $236 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin.
“These minutes actually somewhat muddy the outlook for their eventual exit because they’re publishing almost every possible permutation they could engage in,” he said.
The FOMC 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 in October, 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 2012.
Bernanke said in his Nov. 19 speech that the labor market improvement since September 2012 is “meaningful.”
Policy makers 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.
Federal Reserve Bank of New York President William C. Dudley said yesterday faster economic growth is needed to generate the lasting job gains that would prompt him to back a reduction in stimulus.
“The missing ingredient” is that “we haven’t actually seen an acceleration in the growth rate that will actually sustain the improvement in the labor market,” Dudley said in New York. The economy will probably grow 2.5 percent to 3 percent next year, with growth “a little bit stronger” in 2015, said Dudley, who is also FOMC vice chairman. The committee next plans to meet Dec. 17-18.
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