FOMC Minutes Show Broad Support for Tapering TimelineJeff Kearns
Federal Reserve policy makers considering when to reduce bond buying were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to taper this year if the economy strengthens, with a few saying a reduction may be needed soon, minutes of their last meeting show.
“Almost all committee members agreed that a change in the purchase program was not yet appropriate,” and a few said “it might soon be time to slow somewhat the pace of purchases as outlined in that plan,” according to the record of the Federal Open Market Committee’s July 30-31 gathering released yesterday in Washington.
“A few members emphasized the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases,” the minutes show. “Almost all participants confirmed that they were broadly comfortable” with the committee moderating “the pace of its securities purchases later this year.”
The Fed’s debate over when to taper $85 billion in monthly bond buying has roiled financial markets from Jakarta to Mumbai to New York. Some policy makers have said the purchases, while helping reduce unemployment, are stoking excessive risk taking in assets such as junk bonds and leveraged loans.
The minutes suggest that Fed officials are “still in line for September tapering,” said Michael Gapen, a senior U.S. economist at Barclays Plc in New York, referring to the FOMC’s Sept. 17-18 meeting.
“There’s nothing in the minutes to say it’s going to September definitively, but then there’s little to suggest it isn’t on the table,” said Gapen, a former researcher in the Fed’s Division of Monetary Affairs. “They didn’t seem to want to push the needle much.”
Stocks extended declines following release of the minutes. The Standard & Poor’s 500 Index fell 0.6 percent yesterday to 1,642.80, increasing its decline to 3.9 percent since closing at a record on Aug. 2. The yield on the benchmark 10-year Treasury rose 0.08 percentage point to a two-year high of 2.89 percent.
Fed officials yesterday also discussed the rise in interest rates following the June FOMC meeting.
Some participants indicated that “overall financial-market conditions had tightened significantly,” the minutes said. “They expressed concern that the higher level of longer-term interest rates could be a significant factor holding back spending and economic growth.”
Several others said the rise in rates “was likely to exert relatively little restraint.” In addition, these participants thought that rising stock prices and easier bank lending standards would offset the impact of higher borrowing costs. Some of the officials welcomed the rise in rates “insofar as those developments were associated with an unwinding of unsustainable speculative positions.”
The FOMC will probably reduce its monthly purchases at its meeting next month, according to 65 percent of 48 economists in an Aug. 9-13 Bloomberg survey. The median estimate called for a cut to $75 billion each month.
“They’ll probably start to taper in September,” said Josh Feinman, the New York-based global chief economist for Deutsche Asset & Wealth Management, which oversees $400 billion. “They know that that’s widely anticipated, and they haven’t done anything to deflect those expectations.”
The Fed staff continued to work on tools for the exit from record stimulus, briefing FOMC participants on the possibility of “a fixed-rate, full-allotment overnight reverse repurchase agreement facility as an additional tool for managing money market interest rates.”
Such a tool would allow the FOMC to offer an overnight, risk-free instrument to a “wide range of market participants,” and possibly improve their ability to keep short-term rates at desired levels, the minutes said.
FOMC participants continued to expect economic growth to pick up in the second half of 2013 and “strengthen further.” The minutes said “a number” of participants were somewhat less confident than they were in June due to higher mortgage rates, higher oil prices, slow growth in U.S. export markets and the risk that fiscal restraint might not decrease.
The FOMC affirmed a pledge on July 31 to continue bond buying until seeing signs “the outlook for the labor market has improved substantially.” While employers in July expanded payrolls by 162,000 workers, the smallest gain in four months, the jobless rate fell to a more than four-year low.
Payroll growth over the past six months has averaged almost 200,000, compared with a 141,000 average in the six months before September, when the FOMC announced a third round of bond buying. Also, jobless claims fell to 320,000 in the week ended Aug. 10, the least since October 2007.
With inflation well below the FOMC’s 2 percent target, policy makers have leeway to press on with bond buying that has pumped up the Fed’s balance sheet to a record $3.65 trillion. Their preferred inflation gauge, the personal consumption expenditures index, increased 1.3 percent in the 12 months ended in June. Excluding food and energy, the index rose 1.2 percent.
FOMC participants predicted in June that gross domestic product will grow this year from 2.3 percent to 2.6 percent. During the second quarter, GDP rose at a 1.7 percent annualized rate, after a 1.1 percent gain in the first quarter, according to the Commerce Department.
Stronger U.S. growth and speculation the Fed will scale back bond purchases has helped erase about $1.37 trillion from the value of emerging-market equities in the past three months, data compiled by Bloomberg show.
Emerging-market stocks dropped for a fifth day. India’s S&P BSE Sensex and Indonesia’s Jakarta Composite Index both fell to 11-month lows this week, while Turkey’s lira fell to a record low versus the dollar.
Fed policy makers are “generally much more behind Bernanke” than in June, said Derek Holt, vice president of economics at Scotiabank in Toronto. “While the prior meeting had almost the hint of a rebellion, that seems to have been reined in this time around and they seem much more supportive of Bernanke’s public guidance about out how they will proceed.”