A few Federal Reserve officials thought last month it would soon be time to slow the pace of their bond buying “somewhat” but others counseled patience, according to meeting minutes that offered little hint on when the U.S. central bank might reduce its support for the U.S. economy.
The minutes of the Fed’s July 30-31 meeting, released on Wednesday, showed that almost all of the 12 members of the policy-making Federal Open Market Committee agreed changing the stimulus was not yet appropriate.
Investors are anxiously waiting to see when the Fed will start to slow its $85 billion monthly asset purchases, with most predicting September as the beginning of the end of the aggressive quantitative easing program, known as QE3.
The minutes provided few clues on the potential timing for a reduction and did not mention September specifically, but they did little to dissuade predictions.
“A few members emphasized the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases,” the minutes said.
“At the same time, a few others pointed to the contingent plan that had been articulated on behalf of the committee the previous month, and suggested that it might soon be time to slow somewhat the pace of purchases as outlined in that plan.”
Long-dated U.S. government bond yields rose after the minutes were released, while stocks were volatile. The dollar gained against the yen and euro.
In June, Chairman Ben Bernanke sparked an abrupt bond selloff when he said the Fed expected to trim QE3 later this year and to halt it by mid-2014. In recent days, currencies from India to Indonesia have tumbled as investors fear tighter Fed policy will starve emerging markets of investment.
The minutes on Wednesday appeared crafted to avoid such a reaction, and to give policymakers as much leeway as possible on when to act.
The Fed, which has taken unprecedented steps to help the slow and erratic U.S. economic recovery, wants to see sustainable economic growth and improvement in the labor market before it winds down the bond buying.
Policymakers have pledged to keep rates near zero at least until the unemployment rate falls to 6.5 per cent, provided inflation remains under control.
According to the minutes, policymakers noted that the unemployment rate – which stood at 7.4 per cent last month – had declined “considerably” since the latest round of bond buying began in September. However, there were signs of “more modest” labor market improvement, such as the large number of Americans who had given up the hunt for work.
“The tone of the minutes do not meaningfully reduce the risk of a September taper,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange Inc in Washington, noting that jobless figures for August would be crucial.
The Fed cut overnight interest rates to near zero in 2008 and has more than tripled its balance sheet to around $3.6 trillion through a series of bond purchases.
The minutes showed that several policymakers were willing to consider lowering the 6.5 per cent threshold if they determined that an even easier policy stance was needed. Still, a few worried changing the threshold could cause it to be viewed as a moveable goalpost, which could undermine its effectiveness.
In the end, the Fed made no formal policy change after its July meeting, saying in a statement on July 31 that the U.S. economy continues to need support.
This year’s low inflation readings could also encourage the Fed to keep up the easy money policy. Policymakers noted that inflation “persistently below” the Fed’s 2 per cent target “could pose risks to economic performance,” the minutes showed, although they also reaffirmed expectations it should accelerate.
Recent data showing inflation picked up to 2 per cent in the 12 months through July seemed to support that view.
Home and retail sales, as well as jobless claims, have been stronger than expected, and economic growth is on track to improve through the second half of the year.
Speculation about when the Fed will start withdrawing its support for the economy has rattled financial markets in recent months. The yield on the 10-year U.S. Treasury note has climbed more than a per centage point since May, hitting its highest level this week since 2011.
That has weighed on mortgage demand and the housing market, which had been helping sustain the current recovery, prompting some Fed members to note that higher loan rates were inhibiting consumer spending and overall growth, according to the minutes.
Still, several Fed policymakers “expressed confidence that the housing recovery would be resilient in the face of the higher rates.” Robert Tipp, chief investment strategist at Prudential Fixed Income, said that may have unnerved some bond investors who have been scarred by the rapid rise in yields.
“Using (the word) ‘several’ allows the market to interpret this as a large swath of the FOMC being fairly insensitive to what investors have felt has been a large rise in rates,” Tipp said.
Also in July, Fed policymakers discussed a new tool to help manage an eventual retreat from its current loose monetary policy, helping the central bank drain cash from the banking system and maintain short-term rate targets.