Fed officials saw declining benefits from QE, minutes show

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%.

The yield on the benchmark 10-year Treasury note rose 0.05 percentage point to 2.99% at 2:52 p.m. in New York, while the Standard & Poor’s 500 Index fell 0.1% 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.

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