The US Federal Reserve plans to “proceed cautiously” in slowing down asset purchases in an effort to calm market fears over the decision to taper its third round of quantitative easing.
The Fed’s intentions were revealed in the minutes of its December meeting, published on Wednesday. In his press conference after the meeting, Ben Bernanke, the departing chairman, signalled that the Fed was likely to slow its purchases by $10bn at each meeting. The minutes show that this was intended to allay concerns over a quick exit, rather than signal that the Fed was in a hurry to end the QE3 programme.
The decision on when to taper drove global financial markets for most of 2013. Yet the eventual move to slow asset purchases from $85bn to $75bn a month, along with new guidance that interest rates are likely to stay low well after the unemployment rate falls below a threshold of 6.5 per cent, caused little disruption.
The minutes show there was a strong consensus behind the Fed’s decision to taper in December. “Most participants saw a reduction in the pace of purchases as appropriate at this meeting,” they say.
In words reminiscent of the infamous “measured pace” that the Fed used to describe slow interest rate rises in the early 2000s, under chairman Alan Greenspan, the minutes said asset purchases should be slowed down in “measured steps”.
The Fed’s measured pace of rate rises was later blamed for keeping interest rates too low for too long and helping to fuel a house price bubble. The use of similar language again could create concerns about whether the Fed will respond to changing economic conditions.
In the very next line of the minutes, however, the Fed tries to answer those concerns with the contradictory message that “the pace of asset purchases was not on a preset course”.
Even though most Federal Open Market Committee participants supported the decision to taper, several others “stressed that the unemployment rate remained elevated, that a range of other indicators had shown less progress toward levels consistent with a full recovery in the labour market, and that the projected pickup in economic growth was not assured.”
There were also concerns that inflation was too low, indicating that there was some dissent on the rate-setting committee and a group that will push for easy policy to support the economic recovery.
In another signal of the Fed’s willingness to keep asset purchases going if needed, most of the FOMC said they did not think there would be any reason to stop QE3 because of concerns about bubbles or financial stability.
“Most participants judged the marginal costs of asset purchases as unlikely to be sufficient, relative to their marginal benefits, to justify ending the purchases now or relatively soon,” the minutes said.
Most FOMC participants thought that asset purchases were still having a positive effect, although a majority thought that impact was diminishing.
“A majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue, although some noted the difficulty inherent in making such an assessment,” the minutes said.
Stocks on Wall Street fluctuated and the US dollar drifted higher after the indication that the central bank was not on a set schedule to reduce its monthly bond buys. The S&P 500 traded lower near the end of the session on Tuesday, after climbing earlier in the day. The US dollar index rose 0.3 per cent. Since the start of this year, the dollar has risen about 1.2 per cent against the euro.
Additional reporting by Vivianne Rodrigues