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Fed Officials Saw Declining Benefits From QE, Minutes Show

By Joshua Zumbrun and Craig Torres - Jan 8, 2014

 

Federal Reserve officials saw diminishing economic benefits from their bond-buying program
and voiced concern about future risks to financial stability during their last meeting, when they
began to cut 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 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.


‘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 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.


Longer-Run Goal
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 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.


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.


To contact the reporter on this story: Joshua Zumbrun in Washington at
jzumbrun@bloomberg.net
To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net
®2014 BLOOMBERG L.P. ALL RIGHTS RESERVED.


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