Fed is deeply divided over winding down stimulus program

July 10, 2013

Federal Reserve officials remained deeply divided over the best way to wind down their massive economic stimulus program, new internal documents show, and were unable to craft a traditional policy statement that described their thinking last month.

The central bank voted in June to hold steady on $85 billion a month in bond purchases designed to jump-start the recovery. The Fed has tied the program to the health of the job market, and Fed Chairman Ben S. Bernanke told reporters after the meeting that officials would probably start scaling back the program later this year and end it altogether when the unemployment rate hits about 7 percent, which is expected to occur in mid-2014.

But minutes of last month’s meeting released Wednesday reveal little agreement over the date for starting that process. Officials could not even reach consensus over what to say publicly and left the task to Bernanke.

“We conclude there is no general consensus on when to begin tapering, and we have no indication if the recent string of jobs reports constitute the type of improvement some are looking for,” said Eric Green, global head of research for rates and foreign exchange at TD Securities.

According to the documents, several Fed officials believed a slowdown in purchases “would likely soon be warranted” while others said they wanted to see faster economic growth before making a decision. A few officials worried that inflation is too low, and two others expressed concern about the program’s unintended consequences.

The minutes show Fed officials also grappled with how much detail to provide the public about their thinking. Some officials believed that improvements in the labor market warranted a clearly communicated response from the Fed. But others cautioned that giving out too much information could limit their options in their future.

Perhaps the most prescient concern was that any hint of a reduction in stimulus would be seen as the first step in the Fed’s exit from its extraordinary support of the economic recovery.

“Stating an intention to slow the pace of asset purchases, even if the intention were conditional on the economy developing about in line with the [Fed’s] expectations, might be misinterpreted as signaling an end to the addition of policy accommodation,” the minutes said.

Indeed, that is exactly what happened. Stock markets plunged and bond yields spiked over several days following the Fed’s meeting and Bernanke’s comments. Interest rates on 30-year fixed mortgages jumped about half a percentage point in one week. It took public remarks by nine top officials for markets to settle down. The major U.S. stock market indexes were virtually unchanged on Wednesday but interest rates remained elevated.

The debate underscores the challenges facing the Fed as it prepares the economy to stand on its own. Officials have struggled to reassure investors and the public that they will provide support to the recovery as long as necessary while simultaneously taking steps to pull back their bond purchases.

The meeting minutes show officials did agree on one thing: Even after the bond-buying ends, the Fed’s benchmark interest rate should remain low for a considerable time. The central bank has vowed to keep its target rate near zero until at least the unemployment rate reaches 6.5 percent or inflation hits 2.5 percent.

Bernanke has encouraged open discussion of policy among Fed officials and transparency at the central bank overall. Under his leadership, communication has evolved into another tool the Fed uses to influence markets. Speaking at an economics conference in Massachusetts on Wednesday, he defended that approach, even though it is imperfect at times.

“Transparency in central banking is sort of like truth-telling in every day life,” Bernanke said. “You’ve got to be consistent about it. You can’t be opportunistic about it.”

Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.
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