Fed minutes reveal fears bond-buying losing impact

January 9, 2014

Washington (Jan 9)  U.S. Federal Reserve committee members feared that the impact of quantitative easing was diminishing over time when they made the decision in December to begin tapering the central bank's stimulus program.

Minutes released Tuesday show that most members of the Fed's powerful open market committee believed the monthly program of buying $85 billion in U.S. bonds was having the desired impact of keeping rates low.

But they had reservations.

"A majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue, although some noted the difficulty inherent in making such an assessment," the minutes say.

There was also concern over the money pouring into the investment markets because of the program, with members saying it "could provide an incentive for excessive risk-taking in the financial sector.

Critics of the Fed bond-buying program have said it is causing a stock market bubble.

Participants worried the Fed decision to reduce the bond-buying program by $10 billion U.S. a month to $75 billion U.S. would be interpreted by financial markets as a step toward raising its key short-term interest rate.

In response, the Fed said it would keep its short-term rate low "well past" the time the unemployment rate dropped below 6.5%, as long as inflation stays low.

Unemployment, currently around 7%, remains a key concern for the U.S. central bank. Some members wanted to lower the unemployment threshold to 6%, but most favoured basing their tapering decisions on a range of indicators, not just the unemployment rate.

In the end, the improving jobs numbers in the U.S. tipped the balance for the committee. However, it is worried that inflation is so much below the two per cent target.

There was disagreement among committee members about what steps the Fed should take to continue its tapering program throughout 2014.

While the committee decided on a modest initial reduction, some participants would have preferred a larger reduction and setting a pace that would close the bond-buying program relatively quickly. Still others proposed the Fed lay out its path for winding down the stimulus plan so there is less uncertainty over the coming months.

Fed chair Bernanke will preside at his last meeting on Jan. 28-29 and incoming chair Janet Yellen is expected to take over on Feb. 1 .

Yellen has been a strong supporter of Bernanke's aggressive efforts to revive the economy following the Great Recession.

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