Most FOMC Participants Saw QE3 Ending in 2013Joshua Zumbrun and Jeff Kearns
Federal Reserve policy makers said they will probably end their $85 billion monthly bond purchases sometime in 2013, with members divided between a mid- or end-of-year finish.
“A few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013” while a few others specified no time frame, according to the record of the Federal Open Market Committee’s Dec. 11-12 gathering released today in Washington. “Several others thought that it would probably be appropriate to slow or stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet.”
Four years after cutting the main interest rate to near zero, policy makers are expanding their third round of so-called quantitative easing to boost economic growth and cut the jobless rate, now at 7.7 percent. In prior rounds of bond purchases, the central bank bought $2.3 trillion in securities.
The minutes show a divide among FOMC participants on how long the purchases should last. Participants who provided estimates were “approximately evenly divided” between those who said it would be appropriate to end the purchases around mid-2013 and those who said they should continue beyond that date.
“They’re willing to do more QE on the premise that the net benefits outweigh the costs,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank AG in New York. “But they’re more willing to entertain the thought that these actions are going to lose a bit of their efficacy.”
U.S. stocks erased gains after the release of the minutes. The Standard & Poor’s 500 Index fell 0.4 percent to 1,456.37 at 3:39 p.m. in New York after rising today as much as 0.2 percent. The yield on the 10-year Treasury rose 0.06 percentage point to 1.9 percent, the highest level since May.
Economic reports today showed the world’s largest economy picked up even as U.S. lawmakers clashed over fiscal policy. The Bloomberg Consumer Comfort Index rose to minus 31.8 in the period ended Dec. 30, its highest since April, from minus 32.1 a week earlier. ADP Research Institute data showed a 215,000 increase in employment, the largest since February.
At its December meeting, the FOMC announced Treasury purchases of $45 billion a month in addition to $40 billion a month of mortgage-debt purchases begun in September, bringing the total pace of bond buying to $85 billion a month. The FOMC hadn’t set a limit on the program’s size or duration and said last month the purchases will continue “if the outlook for the labor market does not improve substantially.”
The new bond buying follows the expiration at the end of last year of Operation Twist, in which the Fed swapped about $45 billion in short-term Treasuries each month for an equal amount of long-term debt. That kept the total size of the balance sheet unchanged. The new buying will expand the Fed’s total holdings, which are currently $2.91 trillion.
Officials discussed the possible risks of new bond buying, with “a number” expressing concern the purchases “could complicate the Committee’s efforts to eventually withdraw monetary policy accommodation” by causing inflation expectations to rise, according to the minutes.
When the time comes to exit from the record accommodation, higher interest rates may mean that the Fed’s “remittances to the Treasury could be significantly affected,” participants said. They also said the FOMC must “continue to assess whether large purchases were having adverse effects on market functioning and financial stability,” according to the minutes.
Policy makers last month also revamped their communications strategy by linking the central bank’s interest rate outlook to unemployment and inflation. The Fed said its target interest rate will stay low “at least as long” as unemployment remains above 6.5 percent and inflation is projected to be no more than 2.5 percent. The FOMC had said previously that rates would stay near zero at least through the middle of 2015.
“They wanted to really explain their policies better,” said Bluford Putnam, a former economist at the Federal Reserve Bank of New York and now chief economist at CME Group Inc., the Chicago-based owner of the world’s largest futures market, said before today’s release. “What they’re really saying is they’re still going to give this economy a boost after it gets going.” Fed officials last month saw signs of improving fundamentals in the economy.
Officials in their discussion of replacing calendar date guidance with economic thresholds said the change would give the public a better understanding of how and when the Fed will begin to raise its main interest rate. Most participants favored the switch, and several said doing so at the December meeting would allow a “smooth transition.”
“Many” officials noted that household balance sheets were improving as debt levels fell and home prices recovered while “net worth was approaching levels seen before the financial crisis,” the minutes said. Fed officials cited higher loan costs and standards for some households and the uncertainty surrounding U.S. fiscal policy as “headwinds.”
“A number of participants suggested that the business sector was well positioned to expand spending and hiring quickly upon a positive resolution of the fiscal cliff negotiations,” the minutes said. “In a few regions, contacts reported concerns about the expense associated with new regulations, including those related to health care, and in some cases indicated a shift to the hiring of part-time workers in order to avoid these costs.”
The Fed’s December meeting took place while U.S. lawmakers and President Barack Obama were negotiating a budget plan to avoid the so-called fiscal cliff of scheduled tax increases and spending cuts. An agreement, which was passed and sent to the White House Jan. 1, delays spending cuts by two months and undoes income tax increases for more than 99 percent of households.
The accord lifted U.S. stocks yesterday to a three-month high, extending last year’s 13 percent rally in the S&P 500 that was the best annual gain since 2009. The benchmark gauge for American equities rose 2.5 percent to 1,462.42 yesterday.
Shares maintained gains last year even as data reports gave mixed signals about prospects for the world’s largest economy. The recovery in housing prices hasn’t been substantial enough to cut the jobless rate.
Housing prices, which began to collapse in 2006 sparking the longest and deepest recession since the Great Depression, are rebounding and providing a boost to consumer’s balance sheets. The S&P/Case-Shiller index of home prices in 20 cities increased 4.3 percent from October 2011, the biggest 12-month advance since May 2010.
A rebound in auto sales is another bright spot. General Motors Co., Ford Motor Co. and Chrysler Group LLC posted December U.S. vehicle sales gains that exceeded analysts’ estimates, completing a year of surprising growth.
U.S. deliveries of cars and light trucks climbed 10 percent for Chrysler, 4.9 percent for GM and 1.6 percent for Ford, according to company statements. The automakers topped analysts’ average projections for gains of 7.6 percent by Chrysler, 2.1 percent by GM and 1.2 percent by Ford in a Bloomberg survey.
Still, hiring remains short of what Fed officials have said they want to see before reducing their unprecedented easing measures. Payrolls expanded by 146,000 in November and 138,000 in October. Bernanke said in a September press conference that payrolls growth in the prior six months, in which it averaged 119,000 a month, isn’t the kind of “ongoing, sustained improvement” in the labor market policy makers want to see.
Economists expect little change when the Labor Department releases its report for December at 8:30 a.m. tomorrow. The median estimate in a Bloomberg survey projects that employers added 150,000 jobs and the unemployment rate remained at 7.7 percent.
Joblessness has fallen to a four-year low from a 26-year high of 10 percent in 2009. Still, that compares with an average of 5.8 percent since the government began collecting the data in 1948, and a rate as low as 4.4 percent in 2007. Almost 4.8 million Americans have been out of work for six months or more, and they account for 40 percent of the total number who are out of work, Labor Department data show.
“The conditions now prevailing in the job market represent an enormous waste of human and economic potential,” Bernanke said at a Dec. 12 press conference. “A return to broad-based prosperity will require sustained improvement in the job market, which in turn requires stronger economic growth.”
Gross domestic product expanded by 3.1 percent in the third quarter, rebounding after growth slowed to 1.3 percent in the second quarter from 2 percent in the first quarter, according to Commerce Department data.
The U.S. economic expansion probably will be crimped without being halted by Congress’s budget deal, which permanently reinstates the income tax cuts for most workers that ended Dec. 31, continues expanded unemployment benefits and delays automatic spending cuts for two months. It would let a 2 percentage-point payroll-tax cut expire.
The elimination of the payroll-tax cut, coupled with higher income taxes on the wealthy, will help clip growth in the first quarter to 1 percent, from 3.1 percent in 2012’s third quarter, the latest data available, according to economists at JPMorgan Chase & Co. and Bank of America Corp.
“The U.S. consumer continues to be stronger and housing gets better,” Jeffrey Immelt, chairman and chief executive officer at General Electric Co., said at a Dec. 17 investor meeting. “But there’s no doubt that the fiscal uncertainty slowed activity in the fourth quarter of the year.”