Currency Brief: “A little exhaustion” at the Fed on the asset purchase program

on Jan 9, 2014
Updated: Oct 21, 2019
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Minutes from the last FOMC meeting revealed that as top policy makers began to see the risks to the economic outlook as increasingly balanced, most agreed that the time was right to reduce the bond purchases to $75 billion a month from $85 billion. Fed official have since indicated they expect a gradual cutback over the course of this year avoiding any major economic disruptions.

“Most members agreed that the cumulative improvement in labor market conditions and the likelihood that the improvement would be sustained indicated that the Committee could appropriately begin to slow the pace of its asset purchases at this meeting,” according to minutes of the FOMC meeting released yesterday.
Most Fed officials believed it would be appropriate to taper bond buys altogether by the second half of 2014, the minutes said, without identifying officials by name or providing more detail about the number who held various views.

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One concern for officials on the Fed’s policy meeting was low and falling U.S. inflation, which is now well below the central bank’s 2 per cent target. This is the same concern putting pressure on the ECB we have discussed a couple of times already. U.S. officials recapped that they envisaged consumer prices would pick up this year along with economic activity, but they appeared less certain about that forecast.

“Inflation was running below the Committee’s longer-run objective, and this was seen as posing possible risks to economic performance,” the minutes said. “Many members saw a need for the Committee to monitor inflation developments carefully for evidence that inflation was moving back toward its longer-run objective.”
Others also expressed concern about indicators of obstinately persistent labor-market weakness, including low workforce participation.

“For some, considerable slack remaining in the labor market and shortfall of inflation from the Committee’s long-run objective warranted continuing asset purchases at the current pace for a time in order to wait for further progress toward those objectives,” the minutes said.
In addition, the Fed made important changes to the language of its statement by declaring that it would not raise short-term interest rates until “well past the time” that the unemployment rate fell below 6.5 per cent.

This was the dovish tone that marked the meeting on Dec 17-18 and suggested the sentiment in favor of
trimming bond purchases with 9 to 1 votes and therefore not unanimously.

Fed staff conducted a survey of top policy makers before the meeting on the costs and benefits of asset purchases. It found “a majority of participants thought that the marginal efficacy of the program was likely declining and exhausted as purchases continue,” the minutes said.
Officials also worried, following a spike in interest rates during the summer, that its decision to reduce bond buys might be interpreted as moving forward the date of an eventual interest-rate increase. Officials went out of their way to reassure markets that this is not the case. The last meeting for the year 2013 will be, amongst others, remembered with exactly this distinction.

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