Fed wanted cautious approach to QE3 taper: Minutes

Friday, 10 January 2014 00:00 - - {{hitsCtrl.values.hits}}

REUTERS: As the US Federal Reserve’s top officials debated their decision to scale back a massive bond-buying stimulus program last month, they were keen to steer a delicate path and to make it clear that future decisions were not set in stone. Minutes of the Fed’s 17-18 December policy meeting, released on Wednesday, showed many members of the policy-setting Federal Open Market Committee wanted to proceed with caution in trimming the asset purchases.

Most also wanted to stress that further reductions were not on a “preset course” - a message that may become increasingly difficult to convey as the economy strengthens and expectations for an inexorable wind-down get baked into markets. The US central bank surprised many investors by deciding at the meeting to cut purchases by $ 10 billion, bringing them to $ 75 billion per month. Even at that pace the so-called quantitative easing program (QE) is still an aggressive effort to clear the way for investment, hiring and economic growth in the United States. Some of the 10 voting policymakers worried about “an unintended tightening of financial conditions if a reduction in the pace of asset purchases was misinterpreted as signalling that the committee was likely to withdraw policy accommodation more quickly than had been anticipated,” the minutes said. Consequently, many judged the Fed “should proceed cautiously in taking its first action ... and should indicate that further reductions would be undertaken in measured steps.” Yields on US Treasuries edged higher after the release of the minutes. Stocks finished the day flat and the dollar rose. The central bank cited a stronger job market in its landmark decision, which amounts to the beginning of the end of the largest monetary policy experiment ever. And it tempered the move by suggesting its key interest rate would stay near zero even longer than previously promised - a nuanced policy change that also drew debate at the meeting. The minutes showed that policymakers wanted to stress to the public that further reductions to bond buying would depend on progress in the labour market and on inflation, as well as on how well the program was judged to work in the months ahead. Polls show that economists expect a relatively uniform withdrawal of accommodation, dropping by about $ 10 billion per meeting, until the bond buying is finally shelved by year end. But as the rise in bond yields suggested on Wednesday, investors may expect an even quicker end to the program given recent growth in jobs, consumer spending, manufacturing and housing, as well as a budget deal Congress struck in December. Fed Chairman Ben Bernanke, who is scheduled to step down on 31 January and be replaced by Vice Chair Janet Yellen, told reporters after the 18 December decision that the purchases would likely be cut at a “measured” pace through much of this year, with the program fully shuttered by late-2014. The Fed’s next policy meeting is from 28-29 January.