Fed officials who favored maintaining the pace of purchases cited concerns about the effects on the economy from “the tightening in financial conditions in recent months, as well as about the considerable risks surrounding fiscal policy” and viewed recent economic data as “having been on the disappointing side.”
Economists had forecast the FOMC would dial down monthly Treasury purchases by $5 billion, to $40 billion, while maintaining its buying of mortgage-backed securities at $40 billion, according to a Bloomberg survey.
The minutes also show debate over the strategy for winding down purchases, with some members favoring a reduction only in Treasuries.
“A few participants expressed a preference for not cutting MBS purchases but reducing purchases only of Treasury securities initially, with the intent of continuing to support the recovery in the housing sector,” the record showed. “However, the appeal of including both types of securities in any reduction was also mentioned.”
The decision to forgo a reduction surprised financial markets. The day of the FOMC statement, the Standard & Poor’s 500 Index climbed 1.2% to 1,725.52, while the yield on the 10-year Treasury note dropped 0.16 percentage point to 2.69%. Oil rose more than 2.5%.
The FOMC’s December meeting will be followed by Chairman Ben S. Bernanke’s final scheduled press conference.
The Fed is set to have a new chairman after the end of Bernanke’s term in January as President Barack Obama nominated Vice Chairman Janet Yellen today as Bernanke’s successor. Yellen, a key architect of record stimulus, would be the first female leader in the central bank’s 100-year history.
Atlanta Fed President Dennis Lockhart said on Oct. 3 the central bank’s decision was “wise” given the subsequent partial government shutdown.
“We avoided a potentially very awkward situation of reducing stimulus just on the eve of what now has developed,” Lockhart told reporters at a conference in Atlanta. The decision to delay a reduction in bond purchases “now is vindicated by the developments.”
The government shutdown may shave as much as 0.1 percentage point from economic growth in its first week, according to the median estimate of 40 economists in a Bloomberg survey, with costs accelerating if the closing persists.
The shutdown stretched into its second week and the U.S. Treasury is moving closer to exhausting its borrowing authority and risking a default as Congress has not agreed to raise the U.S. debt limit.
Obama yesterday offered the possible contours of a resolution, saying he could accept a short-term deal to fund the government and raise the debt ceiling while he negotiates with Republican leaders over fiscal policy and his signature health- care law.