Federal Reserve officials saw slumping economic benefits from their bond-purchasing program and talked regarding concern about future risks to monetary stability during their last meeting, when they started to trim down the pace of purchases.
“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 December 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 January 28-29 to consider the next step in their method of gradually trimming the pace of bond purchasing as the economy strengthens. The minutes didn’t describe a set schedule for slashes, 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.
‘Substantial Improvement’
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 noted that “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 at 2:52 p.m. in New York, while the Standard & Poor’s 500 Index fell 0.1 percent to 1,836.41.
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.
‘Measured Reduction’
Fed Chairman Ben S. Bernanke on December 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 December 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.
Longer-Run Target
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.
Unprecedented Easing
Policy makers met in the final weeks of Bernanke’s eight-year tenure, which ends January 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 December 18 tapering announcement, with the yield on the 10-year Treasury note rising to 3.03 percent on December 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 December 31.
Bernanke said in a January 3 speech that the country may be poised for faster growth.
Less Restraint
“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 today.
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.
