December 12, 2019

Rising Chorus at the Fed to End Stimulus Sooner

The chairman, Ben S. Bernanke, said after the most recent meeting of the Fed’s policy-making committee last month that the central bank planned to gradually diminish its monthly bond purchases starting later this year and ending in the middle of next year, as long as economic growth continued.

But “about half” of the 19 officials who participate in the committee’s meetings “indicated that it likely would be appropriate to end asset purchases late this year,” according to the account of the June meeting that the Fed released after a standard delay.

The account does not imply an earlier endpoint for the bond-buying program. Only 12 of the 19 officials vote on policy, and proponents of a later end date still command a majority of the votes.

Moreover, the Fed has said repeatedly that the actual timing will depend on economic conditions, and in particular on evidence that the outlook for the labor market has improved substantially. That is a standard the economy has yet to meet, at least to the satisfaction of the majority that backs the bond-buying program.

“Many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases,” the account of the meeting said. “Some added that they would, as well, need to see more evidence that the projected acceleration in economic activity would occur, before reducing the pace of asset purchases.”

The Fed is adding $85 billion a month to its holdings of Treasury and mortgage-backed securities as part of its broader campaign to stimulate the economy and increase the pace of job growth. The centerpiece of that campaign is the Fed’s declared intention to hold short-term interest rates close to zero for at least as long as the unemployment rate remains above 6.5 percent.

Mr. Bernanke’s announcement that the Fed intended to dial back the pace of its purchases unsettled investors who have staked vast sums on the proposition that the Fed would keep trying to boost growth. Interest rates rose, in part because of the suggestion that the economy was doing better and in part because of the suggestion that the Fed intended to provide less help than expected.

A flurry of follow-up speeches by Fed officials helped to stabilize markets, but did not reverse the initial rise in interest rates.

The account published Wednesday makes clear that the Fed is not yet ready to curtail its bond buying. And it underscores again that the Fed has not fixed a date for the beginning of its deceleration. But it also revealed a surprising degree of internal opposition to the plan that Mr. Bernanke presented last month as representing a consensus of the Federal Open Market Committee.

The Fed has advanced the argument that it has not sought to stimulate the economy even more aggressively because the available methods have uncertain benefits and uncertain consequences, and it is best to move cautiously in dark rooms.

“The claim that the Fed is responding insufficiently to the shocks hitting the economy rests on the assumption that policy is made with complete certainty about the effects of policy on the economy,” John Williams, president of the Federal Reserve Bank of San Francisco, wrote in a research paper published Tuesday that seeks to use economic models to justify the Fed’s instinctual caution. “Nothing could be further from the truth. Once one recognizes uncertainty, some moderation in monetary policy may well be optimal.”

Officials are particularly concerned that bond buying could destabilize financial markets, although the account of the June meeting said that so far, “The system’s purchases of longer-term assets do not appear to have had an adverse effect on the functioning of markets.”

The account also served notice that the Fed is no longer committed to the exit strategy it first described in 2011. As Mr. Bernanke said last month, most Fed officials no longer favor selling the Fed’s holdings of mortgage bonds as the economy gains strength. The account noted that “many of the details of the eventual normalization process would likely differ from those specified two years ago.”

Interestingly, however, Fed officials deferred discussion of that new plan, citing a need to focus on the current stimulus campaign, perhaps because they’ve learned the hard way in recent years that investors treat every future plan as if it will be implemented tomorrow.

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