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 Minutes of the Fed's December 17-18 policy meeting, released on
Wednesday, showed many members of the policy-setting Federal Open
Market Committee wanted to proceed with caution in trimming the
asset purchases.
Most also wanted to stress that further reductions were not on a
"preset course" — a message that may become increasingly difficult
to convey as the economy strengthens and expectations for an
inexorable wind-down get baked into markets.
The U.S. central bank surprised many investors by deciding at the
meeting to cut purchases by $10 billion, bringing them to $75
billion per month. Even at that pace the so-called quantitative
easing program (QE) is still an aggressive effort to clear the way
for investment, hiring and economic growth in the United States.
Some of the 10 voting policymakers worried about "an unintended
tightening of financial conditions if a reduction in the pace of
asset purchases was misinterpreted as signaling that the committee
was likely to withdraw policy accommodation more quickly than had
been anticipated," the minutes said.
Consequently, many judged the Fed "should proceed cautiously in
taking its first action ... and should indicate that further
reductions would be undertaken in measured steps."
Yields on U.S. Treasuries edged higher after the release of the
minutes. Stocks finished the day flat and the dollar rose.
The central bank cited a stronger job market in its landmark
decision, which amounts to the beginning of the end of the largest
monetary policy experiment ever. And it tempered the move by
suggesting its key interest rate would stay near zero even longer
than previously promised — a nuanced policy change that also drew
debate at the meeting.
PRESET COURSE?
The minutes showed that policymakers wanted to stress to the public
that further reductions to bond buying would depend on progress in
the labor market and on inflation, as well as on how well the
program was judged to work in the months ahead.
Polls show that economists expect a relatively uniform withdrawal of
accommodation, dropping by about $10 billion per meeting, until the
bond buying is finally shelved by year end.
But as the rise in bond yields suggested on Wednesday, investors may
expect an even quicker end to the program given recent growth in
jobs, consumer spending, manufacturing and housing, as well as a
budget deal Congress struck in December.
"With increased confidence about the sustainability in economic
recovery and concerns about the declining benefit of the QE3
program, the risk is for a faster wind-down in purchases than is
currently being priced into the market," said TD Securities analyst
Millan Mulraine.
While there were only 10 officials voting on Fed policy in December,
a broader group of 17 took part in last month's meeting.
Of those, some questioned the appropriateness of reducing the pace
of stimulus while inflation remains low, near 1 percent. Some
others, meanwhile, pushed for a sharper cut to the purchases and a
quicker end to the program.
Fed Chairman Ben Bernanke, who is scheduled to step down on January
31 and be replaced by Vice Chair Janet Yellen, told reporters after
the December 18 decision that the purchases would likely be cut at a
"measured" pace through much of this year, with the program fully
shuttered by late-2014.
The Fed's next policy meeting is Jan. 28-29.
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WHEN TO FINALLY RAISE RATES
To recover from the recession, the central bank has held interest
rates near zero since late 2008 to spur growth and hiring. It also
has quadrupled the size of its balance sheet to around $4 trillion
through three rounds of massive bond purchases aimed at holding down
longer-term borrowing costs.
The Fed's extraordinary money-printing has helped drive stocks to
record highs and sparked sharp gyrations in foreign currencies,
including a drop in emerging markets last year as investors
anticipated an end to the easing.
Seeking to temper the move, the Fed added it would likely keep rates
at rock bottom "well past the time" that the jobless rate falls
below 6.5 percent, especially if inflation expectations remain below
target — a noteworthy tweak to an earlier pledge to keep rates
steady at least until the jobless rate hits 6.5 percent.
While the minutes showed a few FOMC policymakers wanted to lower
that so-called threshold to 6 percent, most wanted to make only the
qualitative change to avoid tying an eventual rate rise too tightly
to the unemployment rate alone.
That group wanted to "clarify that a range of labor market
indicators would be used when assessing the appropriate stance of
policy once the threshold had been crossed," the minutes said.
"There was a lot of consensus-building going on," said Brian
Jacobsen, chief portfolio strategist at Wells Fargo Funds Management
in Menomonee Falls, Wisconsin.
"This is pointing out there will be a continuity of policy and the
Fed is going to err on the side of caution when it comes to trimming
asset purchases and to raising rates when it eventually gets to that
point."
U.S. joblessness dropped to a five-year low of 7.0 percent in
November. The December data is due on Friday.
Despite the Fed's assurances that it will continue to keep borrowing
costs low, market rates are creeping up as traders bet on an earlier
Fed rate hike.
Traders now see April 2015 as the first likely meeting at which the
Fed will start to raise rates, three meetings sooner than they had
expected last month, on the back of increasingly rosy economic data.
They added to those bets after the minutes were released, with most
now expecting the Fed to have hiked its main policy rate to 1
percent by October 2015.
(Reporting by Jonathan Spicer and Ann
Saphir; additional reporting by Rodrigo Campos; editing by Andrea
Ricci and Jonathan Oatis)
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