Many on FOMC Said More Progress Needed Before QE Slows

Many Federal Reserve officials said more progress in the labor market is needed before deciding to slow the pace of asset purchases, according to minutes of their last meeting.

“Most observed that the outlook for the labor market had shown progress” since the-bond buying program began in September, according to the record of the April 30-May 1 gathering released today in Washington. “But many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate.”

Policy makers said May 1 they may accelerate or slow monthly purchases of $40 billion in mortgage securities and $45 billion of Treasuries in response to changes in the labor market and inflation. They also pledged to hold the target interest rate near zero as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.

A number of officials said they were willing to taper bond buying as early as the next meeting on June 18-19 if economic reports show “evidence of sufficiently strong and sustained growth,” according to the minutes.

The record gives more detail on a debate within the Fed over how and when to curtail asset purchases that have enlarged its balance sheet to a record $3.35 trillion. The committee led by Chairman Ben S. Bernanke is pressing on with purchases until the outlook for the labor market has “improved substantially.”

The minutes also showed that Fed officials began a review of their exit strategy, which was adopted in June 2011 as they sought to assure investors the central bank had the means to avoid igniting inflation once job growth, wages, and demand started moving up.

Still Valid

While “the broad principles adopted almost two years ago appeared generally still valid,” the minutes showed, the larger balance sheet “suggested a need for greater flexibility.”

Officials disagreed over whether the principles should be formally revised or if they should wait in order to learn more about how the exit might unfold. Bernanke instructed the Fed’s staff to study the issue, the minutes said.

Bernanke earlier today said in testimony to the Joint Economic Committee of Congress that the world’s largest economy remains hampered by high unemployment and government spending cuts, and raising interest rates or reducing asset purchases too soon would endanger the recovery.

Home Prices

While the economy is expanding, as home price gains and record stock prices help offset federal budget cuts, employment growth still hasn’t been sufficient for Fed officials to alter their unprecedented monetary easing.

“It’s a moderate recovery and we’re overcoming a record fiscal drag,” Joseph Carson, director of global economic research at New York-based AllianceBernstein LP, which has $453 billion in assets, said before the minutes were released. “We’ve actually had fairly good growth even during the fear about the fiscal cliff” and the U.S. has experienced “very consistent growth in the labor market.”

Payrolls expanded by 165,000 workers last month while revisions added a total of 114,000 jobs to the employment count in February and March, Labor Department data show.

Federal Reserve Bank of New York President William C. Dudley said yesterday he hasn’t decided whether the central bank’s next move should be to increase or decrease bond-buying.

“Because the outlook is uncertain, I cannot be sure which way, up or down, the next change will be,” Dudley said in a speech in New York.

Bullard Comments

St. Louis Fed President James Bullard, who votes on policy this year, said yesterday the central bank should continue the purchases because they’re the best available option for policy makers to boost growth that is slower than expected.

Dudley’s and Bullard’s comments helped lift U.S. stocks to a record. The Standard & Poor’s 500 Index advanced 0.2 percent to close yesterday at an all-time high of 1,669.16, extending this year’s gain to 17 percent.

Some Fed officials in recent weeks have signaled they favor tapering the quantitative-easing program in the next few months. San Francisco Fed President John Williams said last week that the Fed may want to reduce the pace of its purchases as early as this summer “if all goes as hoped.”

Chicago’s Charles Evans said May 20 that he’d like to see monthly employment growth of 200,000 or more for at least six months before judging the labor market substantially improved. Employers have added an average of 173,000 workers a month over the past year.

‘Getting Better’

Kansas City Fed President Esther George said May 10 the “employment picture is getting better,” with monthly payroll growth averaging about 200,000 “a positive sign.” George, who has dissented this year against FOMC decisions, also said the central bank’s unprecedented stimulus threatens to eventually push up long-term inflation expectations.

While the jobless rate has moved toward the Fed’s goal of 5.2 percent to 6 percent, inflation has fallen further from the long-run target of 2 percent, dropping in March to 1 percent from a year earlier, the slowest since 2009, according to the Fed’s preferred inflation gauge.

The world’s largest economy expanded at a 2.5 percent annualized rate in the first quarter, the Commerce Department said last month. The gain followed a 0.4 percent fourth-quarter advance, the slowest since the first quarter of 2011. The economy will grow 2 percent this year, according to the average of 81 estimates in a May 3-8 Bloomberg survey of economists.

Consumer Confidence

Rising home prices are boosting consumer confidence and helping prop up spending. The S&P/Case-Shiller index of property values in 20 cities rose 9.3 percent in February from a year earlier for the biggest surge since May 2006.

Growth continues even as government budget cuts restrain the expansion. The $85 billion in across-the-board spending cuts known as sequestration commenced on March 1 and will probably cut U.S. gross domestic product by 0.6 percentage point this year, according to a Congressional Budget Office estimate. The Pentagon will impose furloughs starting July 8 on as many as 680,000 civilian employees.

Government outlays have declined in 10 of the past 11 quarters, while defense spending dropped at an 11.5 percent annualized pace in the first quarter following a 22.1 percent plunge in the last three months of 2012. That was the biggest back-to-back decline on average since 1954, when the military demobilized after the Korean War.

Grocery Chain

Kroger Co., the largest U.S. grocery-store chain, expects the economy to improve gradually as consumers remain reluctant to increase their spending amid an uncertain job market.

“It’s still an environment where the economy is going to improve very slowly over time,” Mike Schlotman, the Cincinnati-based grocer’s chief financial officer, said in an April 30 investor conference. “If you look beneath unemployment figures, you have those people who have left the workforce entirely or they’ve just stopped looking. And you have people who have taken a job or they’re underemployed.”

A Labor Department gauge of unemployment that includes marginally attached workers -- those available for work who haven’t searched in a year -- as well as those forced to work part-time because of the sluggish economy, was 13.9 percent last month, near the same level as December 2008, during the longest and deepest economic contraction since the Great Depression of the 1930s.

(Corrects date of June FOMC meeting in fourth paragraph.)
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