Federal Reserve policy makers were considering scaling back their huge stimulus effort slightly earlier than expected if the economy shows signs of strength, according to minutes released Wednesday of their most recent meeting last month.
While experts interpreted the comments as being slightly less accommodative in terms of monetary policy than anticipated, they were quick to note that the meeting took place before last Friday’s report on unemployment and job creation in March, which was much weaker than expected.
Since last year, the Fed has been purchasing $85 billion a month in Treasury bonds and mortgage-backed securities in an effort to keep interest rates ultralow and spur economic growth.
Despite the possibility the Fed might pull back on stimulus efforts early, stocks on Wall Street rallied to new highs in midday trading Wednesday, with the Standard Poor’s 500-share index and the Dow Jones industrial average both rising by more than 1 percent.
Until the most recent report on unemployment, there were signs the labor market was picking up steam, a crucial criteria in helping Fed policy makers decide when to scale back the bond purchases.
Since Friday’s report, however, worries have returned that slow levels of job creation will keep unemployment at historically high levels. The jobless rate was 7.6 percent in March, much higher than normal for this stage of a recovery. And the economy created only 88,000 jobs in March, a far cry from the 268,000 jobs added in February.
“They were seeing a different world than they’re seeing today,” said Michael Hanson, senior United States economist at Bank of America Merrill Lynch. Besides the weak jobs figures, recent data for manufacturing has been soft, while consumer confidence remains mixed.
The meeting, held on March 19 and 20, came after a series of more positive indicators in January and February, Mr. Hanson said.
The Federal Reserve has said it plans to continue the stimulus efforts until there is “substantial improvement” in the labor market outlook.
The minutes of the policy meeting show that the more dovish Fed officials favored continuing the bond purchases at least through the end of the year, while more hawkish ones argued the purchases should be scaled back in the middle of 2013 and finish by December.
“Several” members of the Fed’s Open Market Committee “thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end,” according to the minutes.
Two members of the committee indicated the purchases should continue at the current pace through the end of 2013, while one argued they should be trimmed back immediately. More hawkish Fed officials worry the stimulus efforts could artificially push up prices, while increasing the risk of a rapid run-up in rates once the stimulus is withdrawn.
The chairman of the Federal Reserve, Ben S. Bernanke, has been supportive of the continued asset purchases.
“But it does seem that outside his core supporters, members are wavering,” said Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors. “But remember the March payroll data were not known at this meeting, and the tone will likely be different next time. Still, our antennas are twitching a bit.”
The Fed was forced to release the minutes five hours early, at 9 a.m. Eastern time, after officials realized they had inadvertently been distributed Tuesday afternoon to more than 100 Congressional staff members and trade organization officials.
The minutes are closely watched by traders and investors for any clue about Fed policy, making them among the most market-sensitive documents the government releases. Participants in the multitrillion dollar bond market follow the zigs and zags of the Fed especially intently, since even a small move in rates can move bond prices sharply.
“The reason is they were inadvertently sent early to a list of individuals who normally receive the minutes by e-mail shortly after their usual release time,” the Federal Reserve said in a statement. The error was traced to the Fed’s Congressional liaison office and a mistake there by an employee, Brian Gross, who has worked at the Fed for a decade. “This was human error,” said one Fed official who insisted on anonymity because of the sensitivity of the matter.
There was no indication that any of the recipients profited through the early release by trading on the information, but the Federal Reserve’s inspector general has been asked to review release procedures in light of the incident. The Fed also said it alerted the Securities and Exchange Commission as well as the Commodity Futures Trading Commission.
Like many experts, Mr. Hanson foresees growth slowing in the second and third quarter of 2013, following what he estimates was a 3 percent increase in output in the first quarter.
Most of that is because of tightening fiscal policy from Washington, Mr. Hanson said, as the government’s automatic spending cuts imposed by Congress go into effect. He estimated growth would come in at 1.3 percent in the second quarter and 1.5 percent in the third quarter.
Despite the more hawkish tone of the minutes, Mr. Hanson said, “We think the Fed’s going to be buying into 2014, tapering off in the spring and not finishing until the fall of 2014.”
Article source: http://www.nytimes.com/2013/04/11/business/economy/fed-officials-split-over-end-of-easing.html?partner=rss&emc=rss