Federal Reserve officials were nearly united in support of slowing US central bank asset purchases later this year, but divided on the timing of their first move, according to minutes from their last meeting on July 31st. They also openly debated delaying the first increase in interest rates.
The Fed minutes, released last night, show policy makers grappling with what would be their first step towards trimming monetary support for the US recovery that they put in place in various stages since the recession and financial crisis.
Stocks and US treasury prices fell, while the US dollar extended its advance, after the release of the minutes. The S&P500, the broad measure of US stocks, fell 0.6 per cent to 1,642 points, its lowest level since the start of July.
Reducing money supply
The window into the Fed's thinking provided by the minutes comes at a time when the possibility that the US central bank will start reducing the supply of easy money has caused anxiety in global markets.
Equity indices have suffered, bond yields have risen and in recent days emerging markets such as India have been plunged to turmoil.
According to the Fed minutes, "almost all participants" in the meeting were "broadly comfortable" with plans outlined by Ben Bernanke, Fed chairman, to scale back its $85 billion in monthly bond purchases this year, and wind them down entirely by the middle of next year.
But they do not appear to have settled on whether the economy was strong enough to withstand a first tapering step at the next meeting on September 17th-18th.
“A few members emphasised the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases,” the minutes said. It noted that “a few others” had “suggested that it might soon be time to slow somewhat the pace of purchases”.
Vigorous discussion
There appeared to be a vigorous discussion within the central bank about lowering the unemployment threshold – now set at 6.5 per cent – for the first rise in interest rates, which are close to zero.
Such a move could help alleviate concerns that a move by the Fed to trim and then end what is known as “quantitative easing” will be quickly followed by increases in interest rates. The Fed has always been keen to separate tapering asset purchases from an actual tightening of monetary policy.
The minutes said that “in general there was support for maintaining the current numerical thresholds in the forward guidance” – but they also noted that “several participants were willing to contemplate lowering the unemployment threshold if additional accommodation were to become necessary or if the committee wanted to adjust the mix of policy tools”.
There could also be new thresholds set once the 6.5 per unemployment level was reached “to strengthen or clarify the forward guidance”, according to a number of Fed officials. But a few worried that a move to lower the unemployment threshold could be seen as a variable that might rise as well, undermining its effectiveness. – (Copyright The Financial Times Limited 2013)
