Markets will get plenty of notice before Fed cuts back on bond purchses, minutes show
The Federal Reserve’s political group released the minutes of its December meeting on Wednesday, which showed broad support for maintaining the central bank’s bond-buying program until the economy shows clear signs of sustained recovery.
After the two-day meeting on December 15-16, the Federal Open Market Committee voted to anchor its short-term benchmark rate near zero.
The markets, however, focused on the discussion about the Fed’s purchase program. The central bank has bought at least $ 120 billion in government bonds and mortgage-backed securities each month and pledged at the meeting to do so until it sees “significant further progress” in meeting its inflation and employment targets.
The minutes noted unanimous support for the program’s “results-oriented” approach, although members noted that purchases were not tied to specific numerical goals.
Officials agreed that markets would be informed in a timely manner before asset purchases were restricted. The last time the Fed curtailed its asset purchases it triggered a “tantrum” in the market that officials want to avoid this time around.
“Various participants noted the importance of the committee communicating its assessment of actual and expected progress towards its longer-term goals well in advance of when it is judged to be substantial enough to warrant a change in the pace of buying “It says in the protocol.
Members also noted that the tapering of purchases would be “incremental” after the “substantial further progress” threshold was reached, similar to what the Fed did from 2013 onwards. During the previous reduction in purchases, the Fed has lowered the amount it bought each month. It later allowed a limited amount of proceeds from the bonds that it still held to roll off each month while the rest was reinvested.
The expectation was that the committee could either speed up the buying pace or extend the maturity of the bonds. The latter step would be an attempt to stimulate the economy by lowering longer-term interest rates.
Although markets were paying attention to the extent to which members of the Favor Committee had to adjust the length of the purchases, the minutes found that only “a few” officials said they were “open” to the idea of buying longer-term bonds.
At the meeting, too, the members adjusted their economic estimates for the next few years. Overall, the committee was less pessimistic about economic growth than it was in September and has lowered its forecast for the unemployment rate.
The explanation after the meeting has practically not changed from the previous meeting, with the exception of the language for buying assets.
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