Federal Reserve officials said they might reduce their $85 billion in monthly bond purchases “in coming months” as the economy improves, minutes of their last meeting show.
Policy makers “generally expected that the data would prove consistent with the Committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months,” according to the record of the Federal Open Market Committee’s Oct. 29-30 gathering, released today in Washington.
The FOMC is considering how and when to taper asset purchases without triggering a rise in interest rates that could slow economic growth and erode gains in the labor market. Their meeting minutes show extensive discussion on how to increase the clarity of their plans to hold interest rates near zero. They made no decisions on those plans.
Policy makers discussed whether to cut the interest rate the Fed pays on excess reserves, currently 0.25%. Janet Yellen, the current vice chairman and the nominee to replace Chairman Ben S. Bernanke, whose term expires in January, told lawmakers last week doing so “certainly is a possibility” even as some Fed officials have been concerned that lowering the rate would damage the functioning of the money market.
Most participants said lowering the rate “could be worth considering at some stage, although the benefits of such a step were generally seen as likely to be small except possibly as a signal of policy intentions.”
Stocks fell and Treasury yields rose following the release of the minutes. The Standard & Poor’s 500 Index declined 0.1% to 1,786.61 at 2:08 p.m. in New York, down from 1,795.73 earlier in the day. The yield on the 10-year Treasury climbed to 2.76%, an increase of 0.06 percentage point, from as low as 2.68% earlier.
Officials also discussed how to clarify or strengthen their communication about the economic thresholds guiding how long interest rates will stay low. Currently the committee has said it will hold rates near zero at least as long as unemployment remains above 6.5% and the outlook for inflation is subdued.
The minutes show “a couple supported reducing the 6.5% unemployment rate threshold, while others said that change may cause concern about how committed the Fed is to the thresholds.”
Several participants said it “could be more helpful” to give more qualitative information on the central bank’s intentions for the fed funds rate after the jobless rate falls below the threshold.
“Such guidance could indicate the range of information that the committee would consider in evaluating when it would be appropriate to raise the federal funds rate,” according to the minutes.
St. Louis Fed President James Bullard has proposed adding an “inflation floor,” and saying the Fed would not raise rates with inflation below 1.5%. The minutes said “in general” the benefits of that proposal were viewed as “uncertain and likely to be rather modest.”
Chairman Ben S. Bernanke said yesterday the Fed will probably hold down its main interest rate long after ending its bond buying, and possibly after unemployment falls below 6.5%.
The Fed chief said investors have become better at “differentiating” between the Fed’s bond-purchase plan and commitment to hold down interest rates. Policy makers have emphasized that a reduction in bond buying won’t indicate that the central bank plans to raise interest rates any sooner.