Fed Officials Saw Waning Gains From Bond Buying, Minutes ShowJoshua Zumbrun and Craig Torres
Federal Reserve officials saw declining economic gains from the central bank’s asset purchases and voiced concern about future risks to financial stability during their last meeting, when they started tapering bond buying.
“A majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue,” the record of the Federal Open Market Committee’s Dec. 17-18 meeting showed. Participants also were “concerned about the marginal cost of additional asset purchases arising from risks to financial stability,” citing the potential for “excessive risk-taking in the financial sector.”
Policy makers will gather Jan. 28-29 to consider the next step in their strategy of gradually reducing the pace of bond buying as the economy strengthens. The minutes didn’t describe a set schedule for reductions, although “a few” officials mentioned the need for a “more deterministic path.”
“A lot of people in the market think asset purchases have had declining benefits over time, and this is the first time I can recall the committee as a whole has really come out and agreed with that sentiment,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.
“The economy seems to be able to stand more on its own now,” Feroli said.
Some Fed officials “expressed the view that the criterion of substantial improvement in the outlook for the labor market was likely to be met in the coming year if the economy evolved as expected,” the minutes said.
At the same time, “several” officials said “a range of other indicators had shown less progress toward levels consistent with a full recovery in the labor market, and that the projected pickup in economic growth was not assured.”
The committee cut monthly purchases to $75 billion in December, from $85 billion, citing improvement in the labor market that pushed the jobless rate down to a five-year low of 7 percent.
The yield on the benchmark 10-year Treasury note rose 0.05 percentage point to 2.99 percent in New York, and the Standard & Poor’s 500 Index was little changed at 1,837.49.
Recent progress on jobs, manufacturing and housing has affirmed the FOMC’s view that the economy is improving enough to take the first step toward exiting stimulus that has swelled the Fed balance sheet to more than $4 trillion.
Fed Chairman Ben S. Bernanke on Dec. 18 said the Fed will “continue to do probably at each meeting a measured reduction” in the pace of purchases. The FOMC will probably taper buying in $10 billion increments over the next seven meetings before ending them in December, according to a Dec. 19 Bloomberg News survey of economists.
The minutes said “many participants expressed concern about the deceleration in consumer prices over the past year.” The personal consumption expenditures price index rose 0.9 percent for the 12 months ending November, more than a percentage point below the Fed’s 2 percent target. Some participants said inflation was unlikely to slow further.
The FOMC lowered its target interest rate to near zero in December 2008 and says it will stay there as long as the unemployment rate remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.
The committee strengthened that pledge last month, saying it “likely will be appropriate” to hold the main interest rate near zero “well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below the committee’s 2 percent longer-run goal.”
Fed staff reported that tests of the reverse-repurchase agreement mechanism had “proceeded smoothly,” and that the program probably would be extended beyond January to gather more information on demand for the facility and gauge its “efficacy in putting a floor on money market rates,” according to the minutes.
The Federal Reserve Bank of New York said last month it increased how much money counterparties can post to the repurchase mechanism to $3 billion from $1 billion. Under the agreements, the Fed lends securities for a set period to temporarily remove cash from the banking system.
Policy makers met in the final weeks of Bernanke’s eight-year tenure, which ends Jan. 31. Vice Chairman Janet Yellen, an architect of the unprecedented easing, was confirmed this week by the Senate to succeed Bernanke.
Interest rates climbed after the Fed’s Dec. 18 tapering announcement, with the yield on the 10-year Treasury note rising to 3.03 percent on Dec. 31, a more than two-year high. The average 30-year fixed-rate mortgage rose to 4.53 percent last week from as low as 3.35 percent in May, according to Freddie Mac data.
Officials discussed and rejected the idea of lowering the unemployment threshold, opting instead to “provide qualitative guidance regarding the committee’s likely behavior after a threshold was crossed.”
Bernanke has said bond buying by the Fed helped bolster the recovery, reducing unemployment in November to a five-year low of 7 percent. Monetary stimulus last year helped push up the Standard & Poor’s 500 Index 30 percent to a record 1,848.36 on Dec. 31.
Bernanke said in a Jan. 3 speech that the country may be poised for faster growth.
“The combination of financial healing, greater balance in the housing market, less fiscal restraint, and, of course, continued monetary policy accommodation bodes well for U.S. economic growth in coming quarters,” he said in Philadelphia.
Recent economic reports have reinforced Bernanke’s outlook.
Companies added more workers than projected in December as U.S. employers grew more optimistic about the prospects for demand, a private report based on payrolls showed yesterday.
The 238,000 increase in employment was the biggest since November 2012 and followed a revised 229,000 gain in November that was stronger than initially estimated, according to the ADP Research Institute in Roseland, New Jersey.