Minutes of Fed meeting show support for Bernanke 'taper'

Participants in meeting last month comfortable with a reduction in bond purchases this year

PUBLISHED : Friday, 23 August, 2013, 12:00am
UPDATED : Friday, 23 August, 2013, 3:49am

US Federal Reserve policymakers were "broadly comfortable" with chairman Ben Bernanke's plan to start reducing bond buying later this year if the economy improves, with a few saying tapering might be needed soon, minutes of their last meeting show.

"Almost all committee members agreed that a change in the purchase programme was not yet appropriate", and a few said "it might soon be time to slow somewhat the pace of purchases as outlined in that plan", according to the record of the Federal Open Market Committee's July 30 to July 31 gathering released on Wednesday in Washington.

"A few members emphasised the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases," the minutes show.

"Almost all participants confirmed that they were broadly comfortable" with the committee moderating "the pace of its securities purchases later this year".

Debate among Bernanke and his colleagues over when to taper US$85 billion in monthly bond buying has roiled financial markets from Jakarta to Mumbai to New York. Some Fed officials have said the bond purchases, while helping reduce unemployment, are stoking excessive risk taking in assets such as junk bonds and leveraged loans.

"They'll probably start to taper in September," said Josh Feinman, the New York-based global chief economist for Deutsche Asset & Wealth Management. "They know that that's widely anticipated, and they haven't done anything to deflect those expectations."

Fed officials also discussed the rise in interest rates following the June FOMC meeting.

Some participants indicated that "overall financial-market conditions had tightened significantly", the minutes said. "They expressed concern that the higher level of longer-term interest rates could be a significant factor holding back spending and economic growth."

Several others said the rise in rates "was likely to exert relatively little restraint". In addition, these participants thought that rising stock prices and easier bank lending standards would offset the impact of higher borrowing costs. Some of the officials welcomed the rise in rates "insofar as those developments were associated with an unwinding of unsustainable speculative positions".

The Fed will probably reduce its monthly purchases at its two-day meeting beginning September 17, according to 65 per cent of 48 economists in polled in a survey this month. The median estimate called for a cut to US$75 billion each month.

The Fed staff continued to work on tools for the exit from record stimulus, briefing FOMC participants on the possibility of "a fixed-rate, full-allotment overnight reverse repurchase agreement facility as an additional tool for managing money market interest rates".

The minutes said such a tool would allow the FOMC to offer an overnight, risk-free instrument to a "wide range of market participants", and possibly improve their ability to keep short-term rates at desired levels.

FOMC participants continued to expect economic growth to pick up in the second half of the year and "strengthen further". The minutes said "a number" of participants were somewhat less confident than they had been in June due to higher mortgage rates, higher oil prices, slow growth in US export markets, and the risk that fiscal restraint might not decrease.

The FOMC affirmed a pledge on July 31 to continue bond buying until seeing signs "the outlook for the labour market has improved substantially".