Consumers are just beginning to reap the benefits of ultra-low interest rates and increased credit. Cutting off the program now could harm that fledgling progress before it is fully realized, Fed officials said in a meeting in January.
That means the Fed is likely to give its latest stimulus initiative more time to filter through the broader economy.
Several Fed officials noted “past instances in which policymakers had prematurely removed accommodation, with adverse effects on economic growth, employment and price stability,” according to the minutes.
In the end, the Fed made no changes at its meeting; it decided to continue its plan to pump billions into the economy. Only one official dissented.
The Fed launched its latest stimulus in September. With Congress in political gridlock, the Fed stepped in to bolster the struggling economy.
It had already reduced its primary interest rate to zero, which generally pushes down an array of other rates. So the central bank decided to buy $85 billion worth of mortgage and government bonds a month, to make borrowing even cheaper for consumers.
Signs of progress
Officials generally agree that the program has worked, spurring a turnaround in the housing market and boosting auto sales, the minutes show. The benefits are also spilling over into other sectors, such as home furnishings and construction materials. Lenders also began to loosen credit standards, giving more Americans the chance to take advantage of rock-bottom rates.
But a few Fed officials began to worry about the unintended consequences of using a nontraditional technique to boost the economy. They called for a reduction or a halt to the program well before the end of this year. In public speeches and in the minutes, they voiced concerns about the risk of inflation and financial instability.
In January, one official dissented from the Fed’s decision to stay the course on stimulus. Esther George, president of the Federal Reserve Bank of Kansas City, has said that low interest rates could increase the risk of inflation and financial instability.
“We must not ignore the possibility that the low-interest-rate policy may be creating incentives that lead to future financial imbalances,” she said in a speech last month.
But in the minutes, several Fed officials stressed that the institution would maintain its easy-money policies “as long as warranted by economic conditions.” Those officials said they were looking in particular for improvement in the labor market.
‘Not just statistics’
In a speech last week, Fed Vice Chair Janet Yellen cited the elevated unemployment rate and length of time many have been looking for jobs as indications that the Fed still has work to do.
“These are not just statistics to me,” she said. “The toll is simply terrible on the mental and physical health of workers, on their marriages and on their children.”
It is also possible that the latest round of bond-buying simply may not have had time to work. In her speech, Yellen estimated that the number of Americans who have been able to take advantage of low rates to refinance their homes or buy new ones is probably lower than in previous recoveries.
There was no discussion during the January meeting of a timeline for ending the bond-buying, according to the minutes. Instead, officials focused on alternative strategies such as varying the pace of purchases or holding on to the securities for longer than planned. The Fed staff noted that leading banks expect the program to end at the beginning of next year, according to the minutes.
The debate within the Fed also highlights the challenges it faces in communicating its strategy, especially as it deploys nontraditional tools. The minutes show that officials are concerned that its policies may not be interpreted correctly.
The Fed has promised to keep its target for interest rates low as long as inflation remains below 2.5 percent and unemployment is above 6.5 percent. However, meeting those thresholds would not trigger an immediate increase in its target rate.
The Fed’s bond-buying program is also not subject to those thresholds. It is possible the Fed could withdraw its stimulus even as it keeps its primary interest rate near zero.