If you believe the hype, the Fed is already eying the exit from the quantitative easing programme it initiated at the end of 2012. That is the spin that’s being put on their January meeting minutes. I think it more accurate to say that some at the fed are eyeing the exit. We have been here before, in both 2009 and 2010, and like in those cases the hawks have the market’s ear.
FT Harding writes that the Fed is backing away from asset purchases, and considering signalling that it will be longer before they sell their assets (recall that the Fed thinks it is the stock of assets they hold which signals policy’s stance) as an alternative to further easing.
The Fed minutes show that the duration of QE3 remains hotly disputed on the FOMC, with “several” other participants sticking to open-ended purchases and warning that stopping too early could damage the economy.
But the balance appears to have shifted since December, when the FOMC was evenly split on whether to keep buying assets until the end of the year or stop earlier. In FOMC terms, “a number” is more than “several”.
The FOMC decided not to change its January statement on the costs and benefits of QE3 pending a review of asset purchases at its March meeting.
Several participants said the FOMC should be ready to slow down the pace of asset purchases. Some dovish officials raised the idea that the Fed could hold its portfolio of assets for longer instead of making its balance sheet bigger.
Minutes released Wednesday of the Fed’s Jan. 29-30 policy meeting showed that officials worried the central bank’s easy-money policies could lead to instability in financial markets and might be hard to pull back in the future. The Fed plans to evaluate how the programs are doing at its next meeting March 19 and 20.
Several officials said that the Fed should be prepared to vary the pace of its asset purchases, depending on how the economy performs and its analysis of the costs and benefits of the program, according to the minutes.
Some Fed officials suggested the Fed may need to alter its stated course to continue the bond-buying programs until the job market improves “substantially,” a threshold it hasn’t defined.
The minutes also suggest that Fed officials may be rethinking their exit strategy. “[A] number of participants discussed the possibility of providing monetary accommodation by holding securities for a longer period than envisioned in the Committee’s exit principles, either as a supplement to, or a replacement for, asset purchases,” the minutes stated.
There is a great tension in these minutes between the staff (who are the best forecasters and had an ‘essentially unchanged’ medium term growth forecast and a ‘little changed’ inflation forecast), and the participants (where the middle is starting get uncomfortable with bond buying).
The participants are the voters, and in contrast to the staff, some of them saw some improvements on the growth front, and in particular they judged that the downside risks had subsided somewhat. This has not yet spilled into their inflation forecast, as nearly all of them expected inflation at or below the 2% target. A few were worried about longer term inflation risks – but this is always the case.
While there is no doubt that the majority in favour of further asset purchases is being challenged, i do think that the really important voters remain keen to keep the programme going for a time. Public comments suggest that Bernanke’s views are found in another part of these minutes:
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; they also stressed the importance of communicating the Committee’s commitment to main- taining a highly accommodative stance of policy as long as warranted by economic conditions.