Fed Taper Likely in ‘Coming Months’ on Better Data

Federal Reserve officials said they might reduce their $85 billion in monthly bond purchases “in coming months” as the economy improves, minutes of their last meeting show.

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 today in Washington.

The FOMC is considering how and when to reduce asset purchases without triggering a rise in interest rates that could slow economic growth and erode gains in the labor market. Their meeting 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.

“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.”

Stocks fell and Treasury yields rose following the release of the minutes. The Standard & Poor’s 500 Index declined 0.4 percent to 1,780.16 at 3:28 p.m. in New York, down from 1,795.73 earlier in the day. The yield on the 10-year Treasury note climbed to 2.80 percent, an increase of 0.09 percentage point.

Excess Reserves

The 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 also discussed how to clarify or strengthen their communication about the economic thresholds guiding how long interest rates will stay low. Currently 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.

Rate Intentions

Several participants said it “could be more helpful” to give more qualitative information on the central bank’s intentions for the federal funds rate after the jobless rate falls below the threshold, the minutes said.

“Such guidance could indicate the range of information that the committee would consider in evaluating when it would be appropriate to raise the federal funds rate,” according to the minutes.

St. Louis Fed President James Bullard has proposed adding an “inflation floor,” and saying the Fed would not raise rates with inflation below 1.5 percent. The minutes said “in general” the benefits of that proposal were viewed as “uncertain and likely to be rather modest.”

“You have to take the inflation target seriously, defend the target from the low level,” Bullard said in an interview today in Chicago. “I continue to be concerned about this issue.”

CPI Reading

The consumer-price index declined in October for the first time in six months, showing inflation remains below the Fed’s 2 percent goal. The gauge dropped 0.1 percent, reflecting cheaper energy, clothing and new cars. Overall consumer prices increased 1 percent in the 12 months ended in October, after a 1.2 percent year-over-year gain the prior month.

Bernanke said yesterday 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.

The Fed chief said investors have become better at “differentiating” between the Fed’s bond-purchase plan and commitment to hold down interest rates. Policy makers have emphasized that a reduction in bond buying won’t indicate that the central bank plans to raise interest rates any sooner.

Bernanke said the labor market improvement since September 2012 is “meaningful.”

Stronger Hiring

The FOMC has pledged to press on with so-called quantitative easing until seeing substantial improvement in the outlook for 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.

Participants 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.

Fed officials saw the economic impact of the government shutdown “as temporary and limited,” while a number said they were concerned about effects of “repeated fiscal impasses” on business and consumer confidence, according to the minutes.

Shutdown Effects

The world’s largest economy expanded at a 2.8 percent annualized pace in the third quarter after a 2.5 percent increase in the prior three months, according to the Commerce Department. A 16-day government shutdown that furloughed as many as 800,000 federal workers reduced fourth-quarter gross domestic product by 0.3 percentage point, the median of 40 economist estimates in a Bloomberg News survey last month.

The minutes show the Fed held a video conference on Oct. 16 to discuss the risk to financial markets from lawmakers failing to reach an agreement to raise the U.S. debt ceiling.

The FOMC said their response would depend on “actual conditions” in financial markets and that they “might act to facilitate the smooth transmission of monetary policy through money markets and to address disruptions in market functioning and liquidity.”

Fed stimulus has also helped push up the Standard & Poor’s 500 Index 165 percent from its bear-market low in 2009. The gauge has increased 25 percent this year through yesterday, poised for the best annual gain since 2003. The rally has pushed the S&P 500’s valuation to almost 17 times reported earnings, the highest in almost four years, data compiled by Bloomberg show.

Dudley’s View

Federal Reserve Bank of New York President William C. Dudley said today 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, 60, 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.

McDonald’s Corp., the world’s largest restaurant chain, said it’s making changes that are attracting more customers from rivals amid elevated joblessness. The Oak Brook, Illinois-based company said last month sales at U.S. stores open at least 13 months rose 0.7 percent in the third-quarter.

“Unemployment remains at higher than desirable levels and retailers are battling for greater portion of a smaller pie,” Chief Executive Officer Don Thompson told investors Nov. 14. “Competition remains intense and we are making adjustments as we strive to better understand these shifting dynamics and their impact on our business.”

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