1. Fed Becoming Worried About Stimulus Side Effects
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WASHINGTON (Reuters) – Federal Reserve officials are increasingly concerned about the
potential risks of the U.S. central bank’s asset purchases on financial markets, even if they look
set to continue an open-ended stimulus program for now.
In a surprise to Wall Street, minutes from the Fed‘s December policy meeting, published on
Thursday, showed a growing reticence about further increases in the central bank‘s $2.9 trillion
balance sheet, which it expanded sharply in response to the financial crisis and recession of
2007-2009.
“Several (officials) thought that it would probably be appropriate to slow or to stop purchases
well before the end of 2013, citing concerns about financial stability or the size of the balance
sheet,” the minutes said, referring to the narrower group of voting Fed members.
Investors picked up on the report’s hawkish tone, with stock prices drifting lower after the
announcement, while the U.S. dollar extended gains against the euro. Yields on the 30-year
Treasury bond hit 3.12 percent, their highest levels since May.
“The minutes of the Federal Reserve‘s December monetary policy meeting revealed a
somewhat surprising level of concern among the ranks of central bankers regarding the
long-term impact of the bank’s asset purchase program, or quantitative easing,” said Omer
Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington D.C.
Still, the Fed appeared likely to continue buying assets for the foreseeable future, having
announced in December it was extending monthly purchases of $40 billion in mortgage
securities and also buying $45 billion in Treasuries each month.
A few of the voting members on the central bank’s policy-setting Federal Open Market
Committee thought asset buying would be warranted until about the end of 2013. A few others
highlighted the need for further large-scale stimulus but did not specify an amount or time frame.
Fed officials generally agreed that the labor market outlook was not likely to improve without
further nudging from the monetary authorities.
QE “HEEBIE-JEEBIES”
The U.S. economy expanded a respectable 3.1 percent in the third quarter on an annualized
basis, but growth is believed to have slowed sharply to barely above 1.0 percent in the last
three months of the year.
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2. Data on Thursday showed a solid gain of 215,000 new private sector jobs for December, while
analysts polled by Reuters last week were looking for a rise of 150,000 new jobs in the Labor
Department’s official survey, due out on Friday.
Still, the minutes indicated worries about quantitative easing policies were spreading beyond
the usual regional Fed hawks who, like Richmond Fed President Jeffrey Lacker, have opposed
additional Fed easing.
“What’s clear from these minutes is that there is little consensus among the members of the
FOMC on how long asset purchases should carry on,” said Jason Conibear, trading director at
Cambridge Mercantile.
“Some members want more accommodation for as long as it takes, some want more but to
start winding it down while others have got the heebie-jeebies about the size of the balance
sheet.”
In the December meeting, the Fed also launched a new framework of policy thresholds,
numerical guideposts that are supposed to give markets and the public a clearer idea of how
policymakers will react to incoming economic data.
Officials say they will keep interest rates near zero until the unemployment rate falls to 6.5
percent for as long as estimates of medium-run inflation do not exceed 2.5 percent.
The minutes suggested it took officials some time to build a consensus around the idea.
“A few participants expressed a preference for using a qualitative description of the economic
indicators influencing the Committee’s thinking,” the minutes said.
U.S. unemployment has come down steadily after hitting a peak of 10 percent in late 2009, but
remains elevated at 7.7 percent.
Fed officials noted worries about the looming “fiscal cliff,” which was dealt with only partly in
an agreement earlier this week, were hurting the confidence of businesses and households.
(Editing by Chizu Nomiyama)
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