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Founded in 1913, the Federal Reserve is the central banking system for the United States.

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Fed likely to trim bond buying in coming months

PUBLISHED : Thursday, 21 November, 2013, 9:47am
UPDATED : Friday, 22 November, 2013, 1:48am

Members of the US Federal Reserve agreed last month they would likely start reducing their bond purchases in coming months if the US job market improved further.

They also weighed the possibility of slowing the purchases even without clear evidence of a strengthening job market.

The Fed’s bond purchases have been intended to keep long-term borrowing rates low to spur spending and growth.

The minutes of the October 29-30 meeting, released on Wednesday, also show that the members wrestled with how to assure investors that even after it cuts back on the US$85 billion a month in bond buys, the Fed still intends to keep its short-term rate near record lows.

At the meeting, the members made no changes in interest rate policy. But many wanted to better communicate to the public the Fed’s plans for both slowing its bond purchases and keeping borrowing rates low to encourage spending.

The discussion suggests some members were worried that investors could mistakenly assume a slowdown in bond purchases, which have kept long-term rates low, will be followed by an increase in short-term interest rates.

Stocks fell on Wednesday after the minutes indicated the Fed might be closer to scaling back its stimulus. The Dow Jones industrial average closed down 66 points.

According to the minutes, Fed members expect incoming data will show improvement in the job market and would “thus warrant trimming the pace of purchases in coming months”.

Interest rates would likely rise once the Fed slows its bond purchases. Higher rates stand to hurt both bond and stock prices.

The minutes did not specify when that first reduction in bond purchases might occur.

Some participants suggested that at some stage it might be appropriate to begin trimming the bond purchases “before an unambiguous further improvement” in the outlook for the job market.

But other Fed officials objected that such a suggestion was premature and wanted more time to assess the impact of the bond purchases.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said this discussion revealed “the battle lines are clearly drawn, with some at the Fed now itching to scale back [bond purchases] unless the incoming data are awful”.

Many Fed officials have stated their desire to keep short-term rates low even after unemployment falls below 6.5 per cent, as long as inflation remains low. The minutes said two officials expressed support for lowering the 6.5 per cent threshold.

And some suggested that even after the first rate increase, the Fed could assure the public that rates would remain low because economic headwinds were likely to diminish only slowly.

The Fed meets again in December, but most economists don’t expect any changes in the bond-buying programme until March. That would be Janet Yellen’s first meeting as Fed chairman.

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