“There are widening divisions among Federal Reserve officials about the value of its efforts to reduce unemployment, but supporters of those efforts remain firmly in control, according to an official account of the Fed’s most recent meeting in January.
An increasingly vocal minority of Fed officials are concerned that buying about $85 billion of Treasury securities and mortgage-backed securities each month is doing more harm than good. They argue the purchases may need to end even before unemployment drops, because the Fed’s efforts are encouraging excessive risk-taking and may be difficult to reverse.
But the Fed’s policy-making committee reiterated its determination in January to hold course until there is “substantial improvement” in the outlook for job growth, and several officials cautioned at the January meeting that the greater risk to the economy was in stopping too soon, according to the account.
“The officials “emphasized that the committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved,” according to the minutes.
The minutes showed policy makers were divided about the strategy behind Chairman Ben S. Bernanke’s program of buying bonds until there is “substantial” improvement in a U.S. labor market burdened with 7.9 percent unemployment, with some saying an earlier end to purchases might be needed, and others warning against a premature withdrawal of stimulus.
At their December meeting, Fed officials debated the date for ending their bond purchases, with officials “approximately evenly divided” between those favoring mid-2013 and those favoring a later end, according to minutes from the meeting. Today’s minutes didn’t indicate a discussion of dates.
“Late last year, the Federal Reserve linked its monetary policy to to the situation in the labor market for the first time. Borrowing costs would stay at rock-bottom, it pledged, until the U.S. jobless rate drops to 6.5 percent, provided inflation doesn’t rise past 2.5 percent.
Well, inflation isn’t anywhere close to 2.5 percent but several members of the Federal Open Market Committee (which handles purchases and sales of government securities that determine the amount of money in the banking system) are already wondering whether the central bank shouldn’t tighten up its policy before America reaches the magic unemployment number.
The minutes from the January FOMC meeting indicate the committee is split on the issue. Here are the crucial excerpts:
The Committee again discussed the possible benefits and costs of additional asset purchases. Most participants commented that the Committee’s asset purchases had been effective in easing financial conditions and helping stimulate economic activity, and many pointed, in particular, to the support that low longer-term interest rates had provided to housing or consumer durable purchases. In addition, the Committee’s highly accommodative policy was seen as helping keep inflation over the medium term closer to its longer-run goal of 2 percent than would otherwise have been the case. Policy was also aimed at improving the labor market outlook. In this regard, several participants stressed the economic and social costs of high unemployment, as well as the potential for negative effects on the economy’s longer-term path of a prolonged period of underutilization of resources. However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy. A few also raised concerns about the potential effects of further asset purchases on the functioning of particular financial markets, although a couple of other participants noted that there had been little evidence to date of such effects. In light of this discussion, the staff was asked for additional analysis ahead of future meetings to support the Committee’s ongoing assessment of the asset purchase program.
… A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred. Several others argued that the potential costs of reducing or ending asset purchases too soon were also significant, or that asset purchases should continue until a substantial improvement in the labor market outlook had occurred. A few participants noted examples of past instances in which policymakers had prematurely removed accommodation, with adverse effects on economic growth, employment, and price stability …
The full text of the minutes is here.