At Meeting, Debate Over Length of Fed Program

WASHINGTON – Federal Reserve officials spoke at a December meeting about ending a new round of asset purchases by the middle of 2013, less than a year after the start of its latest effort to drive down unemployment.

The members of the Fed’s policy-making committee did not settle on a timetable. Some argued that purchases should continue until the end of the year, and others said it was too soon to make a judgment, according to a brief account of the meeting that the Fed published Thursday after a customary three-week lag.

But the support for an early end date reflected uneasiness among Fed officials about the effectiveness of asset purchases in stimulating the economy and about the potential costs, including the disruption of financial markets.

The Fed remains committed to continuing other measures well beyond next year. The central bank announced after the December meeting that it planned to hold short-term interest rates near zero at least until the unemployment rate fell below 6.5 percent, provided inflation remained under control, and it estimated that the rate would cross that threshold no sooner than mid-2015.

In addition to purchasing assets in the coming months, the Fed plans to maintain for the time being the vast portfolio of Treasury securities and mortgage-backed securities that it has acquired since 2008.

“Members generally agreed that the economic outlook was little changed since the previous meeting and judged that without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions,” the account of the meeting said.

The Fed’s current program of asset purchases began in September with the announcement that it would buy $40 billion in mortgage bonds each month until the outlook for the labor market “improved substantially.”

In December, the Fed said it would also expand its holdings of Treasuries by $45 billion each month, replacing a program in which it acquired that amount of long-term Treasuries each month by selling the same amount of short-term Treasuries, so that the total size of its portfolio remained unchanged.

In tying the purchases to economic conditions, rather than a fixed timetable, the Fed sought to underscore its commitment to reducing unemployment, which has persisted at high levels for more than four years.

But in deciding not to announce a threshold, as it did for interest rates, the Fed also has created a measure of uncertainty about its intentions.

The account of the meeting showed that this decision reflects a basic reality: the Fed is not sure about its intentions and wants to remain flexible.

“A few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013,” the account said, “while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases.

“Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet,” it continued, concluding, “One member viewed any additional purchases as unwarranted.”

The value of this description is somewhat reduced because four of the 12 members of the Federal Open Market Committee ended their terms in December. The minutes of the meeting do not make clear which positions the retiring members held, let alone the views of the four Fed officials who will replace them on the committee at the January meeting.

Article source: http://www.nytimes.com/2013/01/04/business/economy/at-meeting-debate-over-length-of-fed-program.html?partner=rss&emc=rss