Fed officials saw declining benefits from QE, minutes show

‘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% for the 12 months ending November, more than a percentage point below the Fed’s 2% 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% and the outlook for inflation doesn’t exceed 2.5%.

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%, especially if projected inflation continues to run below the committee’s 2% 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% on Dec. 31, a more than two-year high. The average 30-year fixed-rate mortgage rose to 4.53% last week from as low as 3.35% 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%. Monetary stimulus last year helped push up the Standard & Poor’s 500 Index 30% 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.


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