Minutes of Fed policy meeting show sharp divisions
WASHINGTON – Federal Reserve officials seem far from a consensus on the question that’s consumed investors for months: When will the Fed slow its bond purchases?
Minutes of their June 18-19 policy meeting show many of the 19 officials felt the job market’s improvement would have to be sustained before the Fed would scale back its bond purchases, which have helped support spending and growth, lifted stocks and kept mortgage rates near record lows?
Many thought the purchases should extend into 2014, according to a summary of economic forecasts that are released with the minutes.
Still, several thought a slowdown in purchases could start soon.
And one faction favored an aggressive timetable: According to a summary of economic forecasts released with the minutes, about half the “participants” favored ending the bond purchases late this year – months earlier than Chairman Ben Bernanke has indicated. Participants include voting and non-voting officials on the Fed’s policy committee.
The divisions revealed Wednesday by the minutes reflect the difficulty investors have had deciphering the Fed’s intentions. Bernanke has carved out a measured stance: At a news conference after last month’s meeting, he said the Fed would likely slow its bond purchases later this year and end them around mid-2014 if the economy continued to strengthen. The Fed has been buying $85 billion in Treasury and mortgage bonds each month since late last year.
Most investors and analysts interpreted Bernanke’s remarks to mean the Fed would likely announce after its September meeting that it will scale back its bond buying.
Many Fed officials side with Bernanke’s approach. But the minutes were a reminder that some officials feel Bernanke’s timetable for slowing the bond buying is too cautious.
Some analysts think the Fed, in the end, will back the chairman’s notion of slowing the purchases later this year – if the outlook for the economy continues to strengthen.
The minutes suggest that a slowdown in the bond buying in September “is not quite a done deal,” said Michael Hanson, U.S. economist at Bank of America Merrill Lynch. “For a taper in September, we may still need to see some more improvement in the economy.”
Yet even the analysts differ. Dana Saporta, an economist at Credit Suisse, said she still thinks the Fed will start pulling back its purchases in September.
The jobs report for June, which was released Friday, “went at least some way towards satisfying those who were looking for more improvement in labor market conditions,” Saporta said.
Unless the economic data significantly worsen in July and August, “it seems like most Fed officials expect tapering to begin in September,” she said.
Employers added 195,000 jobs in June, and revisions showed that another 70,000 jobs were added in the previous two months. The unemployment rate was unchanged at 7.6 percent.
Fed members also struggled at last month’s meeting over how best to convey the Fed’s thinking about its timetable for bond purchases, the minutes showed.
Some wanted to explain it in the post-meeting statement. Others felt the statement might be misinterpreted. In the end, most participants thought Bernanke should lay out the Fed’s thinking in his news conference – and stress that any pullback in bond purchases would depend on the economic outlook.
Bernanke stressed at the news conference last month that if the economy weakens, the Fed wouldn’t hesitate to step up its bond purchases again. Still, stocks and bonds plunged after his remarks, and interest rates surged.
Several Fed members helped steady stock markets in the days that followed by noting that any pullback in bond buying would hinge on the economy’s health, not a target date. Stocks have since regained most of their losses, in part because of encouraging data about the job market and corporate earnings.
Ultra-low rates have encouraged more Americans to buy homes and cars, helped support the economy and cheered the stock market. Investors worried that once the Fed starts scaling back its bond buying, home loans would start to cost more, corporations would pay more to borrow and bond investors would be squeezed.
But steady job gains have raised the likelihood that the Fed will announce after its September meeting that it’s reducing its bond purchases.
Still, economic growth has been subpar. The economy grew at an annual rate of just 1.8 percent in the January-March quarter. Economists think growth stayed below a 2 percent annual rate in the April-June quarter. If so, it would mark a third straight quarter of weak growth.
Most think growth will pick up in the second half of the year but stay around 2 percent for the year.
The Fed’s forecasts are rosier: It predicts growth of 2.3 percent to 2.6 percent this year and more than 3 percent in 2014. It also expects unemployment to fall as low as 7.2 percent by the end of this year and as low as 6.5 percent by the end of 2014.
Many analysts think the Fed could begin slowing its bond purchases from $85 billion a month to around $65 billion in September and gradually shrink them before ending them by next summer. That would likely happen, though, only if the job market and the economy continued to strengthen. Bernanke has said the bond-buying would end when the unemployment rate would be around 7 percent. It’s now 7.6 percent.
Even after it scales back its bond purchases, the Fed will still be providing considerable support to the economy. That’s because it plans to keep its investment holdings – now at a record $3.4 trillion – constant to avoid causing long-term rates to rise too quickly. The end of the bond program would mean only that the Fed’s balance sheet would no longer be growing.
The Fed has also said it plans to keep short-term rates at record lows at least until unemployment slides to 6.5 percent. And Bernanke has emphasized that 6.5 percent unemployment is a threshold, not a trigger: The Fed might decide to keep its benchmark short-term rate near zero even after unemployment falls that low.