Fed Policy Makers Rally Behind Tapering QE as Yellen Era BeginsJoshua Zumbrun and Jeff Kearns
Federal Reserve policy makers trimmed bond buying for a second straight meeting, uniting behind a strategy of gradual withdrawal from Ben S. Bernanke’s unprecedented easing policy as Janet Yellen prepares to succeed him as chairman.
The Federal Open Market Committee said yesterday it will cut monthly bond purchases by $10 billion to $65 billion, citing labor-market indicators that “were mixed but on balance showed further improvement” and economic growth that has “picked up in recent quarters.”
It was the first meeting without a dissent since June 2011, showing the tapering strategy has brought together policy makers concerned the Fed’s record $4.1 trillion balance sheet risks causing asset price bubbles with those who, like Vice Chairman Yellen, say more needs to be done to reduce unemployment.
“As we transition from Bernanke to Yellen, she’s in a pretty good place in terms of holding together the center of the committee,” said Stephen Stanley, chief economist for Pierpont Securities LLC in Stamford, Connecticut. “It should be relatively easy to hold together a pretty wide consensus.”
Policy makers pressed on with a reduction in the purchases, put in place to speed a recovery from the worst recession since the Great Depression, even after payroll growth slowed in December and amid a rout in emerging-market currencies.
The Fed left unchanged its statement that it will probably hold its target interest rate near zero “well past the time” that unemployment falls below 6.5 percent, “especially if projected inflation” remains below the committee’s longer-run goal of 2 percent. U.S. stocks remained lower and Treasuries gained.
“The Fed is staying the course,” said Guy Berger, an economist at RBS Securities Inc. in Stamford, Connecticut. “The hurdle for backing away from the implicit stair-step taper that they’ve suggested, which we view as roughly $10 billion per month, and winding down the program in September, is pretty high.”
The Standard & Poor’s 500 Index extended losses after release of the statement, falling 1 percent to 1,774.20 in New York. The yield on the 10-year Treasury note declined 0.07 percentage point, to 2.68 percent, as investors sought a haven from emerging-market turmoil. The benchmark note yields rose six basis points to 2.89 percent on Dec. 18 after the FOMC announced the first cut to monthly purchases.
The FOMC statement “introduced a little bit more clarity and certainty to markets on the direction of the Fed,” said Heather Loomis, West Coast director of fixed income for JPMorgan Private Bank in San Francisco, who helps oversee $11.5 billion in assets. “It would have been confusing if the noise in emerging markets caused them to change course.”
Treasuries gained earlier yesterday as South Africa’s central bank joined Turkey in raising its benchmark interest-rate in moves that failed to reassure investors, while Russia’s ruble extended its slump to 13 days and Hungary’s forint weakened.
The S&P 500 has fallen 4 percent this year, driven lower by a rout in emerging-market currencies that helped fuel a $1.87 trillion selloff in global stocks in the week to Jan. 27.
The Fed repeated that inflation “persistently below its 2 percent objective could pose risks to economic performance and it is monitoring inflation developments carefully.”
The central bank’s preferred gauge of consumer prices climbed 0.9 percent in the year through November and hasn’t exceeded the Fed’s goal since March 2012.
Bond purchases will be divided between $35 billion in Treasuries and $30 billion in mortgage debt beginning in February, the Fed said. It repeated that purchases are not “on a preset course.”
The Fed’s decisions over the previous 20 meetings have met with dissent, either from those who opposed the Fed’s stimulus policies, or those who said the central bank should do more to boost the economy.
Seven regional Fed bank presidents have dissented since 2011. The Richmond Fed’s Jeffrey Lacker objected to every decision in 2012. Kansas City’s Esther George objected all of last year, until the Fed announced its first tapering in December -- a decision that drew an objection from the Boston Fed’s Eric Rosengren, who believed the Fed was cutting back too soon.
Rosengren later withdrew his opposition, saying in an interview this month he would support a gradual tapering, even though he would have preferred to begin later.
The December’s decision was accompanied by a stronger commitment to keeping interest rates near zero until unemployment declines, an effort to keep long-term interest rates from rising as the Fed curtailed stimulus.
“To the extent that there are doves who had misgivings about tapering, they were probably quelled to a great degree that the forward guidance was strengthened,” Stanley said.
Fed district bank presidents rotate voting on monetary policy each year, with Cleveland’s Sandra Pianalto, Philadelphia’s Charles Plosser, Richard Fisher of Dallas and Narayana Kocherlakota of Minneapolis voting in 2014. Fed governors hold permanent votes, as does the president of the Federal Reserve Bank of New York, who serves as FOMC vice chairman.
Economists surveyed by Bloomberg forecast the Fed would taper purchases by $10 billion yesterday. The FOMC will continue tapering at each meeting and end the program no later than December, according to the Jan. 10 survey.
Bernanke outlined the strategy for tapering at a press conference on Dec. 18, the last of his eight-year tenure. His term ends tomorrow, and Yellen takes over Feb. 1.
“If we’re making progress in terms of inflation and continued job gains, then I imagine we’ll continue to do probably at each meeting a measured reduction,” he said.
Since then, a Labor Department report showed payrolls in December rose at the slowest pace in almost three years, partly reflecting the impact of bad weather. The unemployment rate declined to 6.7 percent, a five-year low, as people left the labor force.
Other data have shown continued strength in an economy that expanded at a 4.1 percent annual pace in the third quarter, the most in almost two years.
Retail sales climbed for the ninth straight month in December as frigid temperatures prodded Americans to buy discounted winter clothing and shop online for the holidays. Industrial production last month capped the strongest quarter since 2010.