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Fed shock decision not to taper QE was 'close call'

Minutes of Fed meet suggest that there was still broad support to trim bond-buying this year

Reuters New York/San Francisco
The Federal Reserve's shock decision last month not to reduce its support for the US economy was a "relatively close call" for policymakers, according to minutes of the meeting that also suggested there was still broad support to trim bond-buying this year.

Since last month's meeting, the outlook for scaling back bond purchases has grown cloudier.

A budget battle in Washington hit a stalemate and forced a partial government shutdown that started this month, threatening economic growth and depriving the Fed of official economic data to drive its decisions.

The minutes of the Fed's September 17-18 meeting, released on Wednesday, clearly showed top officials were concerned their decision to keep buying $85 billion in bonds each month could muddle their messaging with investors who largely expected a reduction.

 

At the conclusion of the much-anticipated meeting, the decision of the Fed's policy-setting Federal Open Market Committee sparked a global stock market rally and depressed the US dollar.

"For several members, the various considerations made the decision to maintain an unchanged pace of asset purchases at this meeting a relatively close call," the minutes said of the 10 voting FOMC members.

Referring to the broader group of 17 Fed policymakers, the minutes said, "most participants judged that it would likely be appropriate to begin to reduce the pace of the Committee's purchases of longer-term securities this year and to conclude purchases in the middle of 2014."

In June, Fed Chairman Ben Bernanke primed markets to expect a cut to the quantitative easing program (QE) when he said the central bank expected to make its first policy move later this year. Yields on US Treasury bonds then mostly rose through the summer in anticipation of a September cut.

The minutes, which briefly lifted US stocks to session highs on Wednesday, said Fed policymakers raised concerns about "the effectiveness of FOMC communications if the Committee did not take that step."

They also worried it might be difficult to explain a cut to QE "in coming months absent clearly stronger data on the economy and a swift resolution of federal fiscal uncertainties," the minutes show.

After the September meeting, Bernanke said the Fed wanted to see more evidence of solid economic growth before trimming the bond-buying, which was launched a year ago and is meant to spur investment, hiring and economic growth. Bernanke also emphasized policymakers were not on a preset course to reduce the program this year, but would only do so if the job market improved.

The minutes, in typical dry tones, underscored the difficulty of the decision.

Some members pointed to mixed economic data, low inflation, and uncertainty over fiscal policy to back their preference "to await more evidence that their expectation of continuing improvement would be realized" before proceeding with a reduction in bond purchases.

Other participants in the discussion, including non-voting members, interpreted the data as consistent with an improving labor market, and urged a small reduction in bond-buying to follow through with Bernanke's signaled plan.

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First Published: Oct 10 2013 | 2:25 AM IST

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