Fed asset purchases

The surprise for many in the minutes was the fact that more than one Fed policymaker called for increased asset purchases, whereas only one called for reduced purchases. I would not go overboard on this – it underscores how far the Fed is from raising rates, but does not mean that additional purchases are likely, even if they have not been ruled out.

The mainstream of the committee will only back increased purchases if the forecast deteriorates – and/or (this is not mentioned in the statement) inflation expectations sag to the point where there appears to be no cost involved in buying more assets, which is highly unlikely.

The larger point, though, is that many policymakers – not just the ones calling for increased purchases now – think policy is on the tight side of optimal, given the forecast for inflation and unemployment. They are willing to live with this, since increasing purchases would carry costs in terms of credibility and expectations. But the forecast will have to shift a lot to get them into an early tightening mode.

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