Fed split in June on QE timing; Bernanke sees easy policy for now
Fed chairman says central bank needs to keep a stimulative monetary policy in place given low level of inflation and 7.6 per cent unemployment rate
About half of the Federal Reserve’s policymakers felt the US central bank’s bond-buying stimulus should be brought to a halt by year end when they met in June, but many wanted reassurance the US jobs recovery was on solid ground before any policy retreat.
In the end, most of the US central bank’s 19 policymakers felt it was a good idea to have Fed Chairman Ben Bernanke lay out a road map at a post-meeting news conference on how they likely would wind down the so-called quantitative easing program, minutes from the meeting released on Wednesday showed.
In doing so, Bernanke said the Fed would likely slow the pace of its bond purchases by year end, with an eye to bringing the stimulus program to a close by mid-next year.
“Several members judged that a reduction in asset purchases would likely soon be warranted,” the minutes of the June 18-19 meeting said. Even so, “many members indicated that further improvement in the outlook for the labour market would be required before it would be appropriate to slow the pace of asset purchases.”
Financial markets see-sawed after the release of the minutes as investors tried to gauge the likelihood of a near-term pullback in the Fed’s bond purchases. But stocks strengthened in after-hours trade and US Treasuries rose after Bernanke reiterated the need for monetary policy accommodation for the foreseeable future and cast doubt over the strength of the US labour market.
The Fed’s June meeting was held before the release of the government’s report on the US labour market for the month of June, which showed surprising strength.
The policy decision in June was taken by 12 voting members of the central bank’s policy panel, but the minutes were silent on the degree to which this group supported Bernanke’s timetable.
“Everybody seems to have their own opinion on when tapering should start. I think it’s maybe more uncertain than before,” said Kim Rupert, managing director of fixed income analysis at Action Economics in San Francisco. “Most had expected September might be a good starting point. This throws a lot more doubt on that timeframe.”
Of the voting Fed policymakers who argued it would be wise to curtail bond purchases soon, two thought it should be done “to prevent the potential negative consequences of the program from exceeding its anticipated benefits.”
A summary of economic projections provided alongside the minutes, which offered views from all 19 top Fed officials - both voting and non-voting - showed that one thought the asset purchase program should end right away, while about half of the others felt it should be shuttered by late this year.
Four non-voters will rotate into voting slots early next year, when many expect Bernanke to depart after eight years in the job.
Investors struggled to get a handle on the Fed’s likely path.
“We are not sure how you can go from ‘many’ needing to see labour gains before tapering begins to half seeing bond buying ending by year end. At the same time, ‘many’ other Fed officials saw bond buying into next year,” said Adrian Miller of GMP Securities. “We are pretty good at math, but we are having trouble adding up the ‘many,’ ‘several’ and ‘about half’ to equal 100 per cent.”
Bernanke, who addressed an economic conference in Cambridge, Massachusetts, on Wednesday said the Fed needed to keep a stimulative monetary policy in place given the low level of inflation and a 7.6 per cent unemployment rate that “if anything overstates the health of the labour market.”
“The overall message is accommodation,” he said. A “highly accommodative policy is needed for the foreseeable future.”
Global investors have recently recovered from a mild bout of panic sparked when Bernanke sketched out the Fed’s expectations for ending its bond purchases. The Fed has been buying US$85 billion a month in US government and mortgage-related debt.
Financial market fears have been allayed by a chorus of officials who have sought to reassure traders that the end of asset buys will not lead to imminent interest rate hikes.
“Many members indicated that decisions about the pace and composition of asset purchases were distinct from decisions about the appropriate level of the federal funds rate,” the minutes said.
Whether the markets have fully gotten the message is not clear. The yield on the 10-year US Treasury note has risen a full percentage point in just two months and stands close to its highest levels since 2011.
The rise in the yield, which moves inversely to the price of Treasuries debt, has already slowed activity in the mortgage market, which has been key to the economy’s rebound.
The government report on US employment for June showed a robust gain of 195,000 jobs for the month and upward revisions to prior months. The jobless rate was steady at 7.6 per cent.
Economists said this improvement would likely keep the central bank on course to trim its bond purchases at its meeting in September.
In June, some Fed officials worried not only about the outlook for employment, but the pace of economic growth as well, the minutes showed. Many economists believe the economy grew at less than a 1 per cent annual rate in the second quarter, although most look for a pick-up in the second half of the year.
“Some (officials) added that they would ... need to see more evidence that the projected acceleration in economic activity would occur, before reducing the pace of asset purchases,” the minutes said.