WASHINGTON – The Federal Reserve agreed last month to modestly reduce its bond purchases because of improvements in the job market that many Fed members felt would be sustained.
Many participants called the job gains “meaningful,” according to the minutes.
Still, minutes of the Dec. 18-19 meeting released Wednesday showed that some participants worried that investors might misread the move as a step toward raising the Fed’s key short-term interest rate.
In response, the Fed said it plans to keep its short-term rate low “well past” the time the unemployment rate dropped below 6.5 per cent, as long as inflation stayed low.
Some members wanted to lower that unemployment threshold to 6 per cent. But the majority opposed doing so. They favoured assessing a range of measures of the job market — not just the unemployment rate — in making any policy changes.
Analysts said the improving job market and better overall economic conditions apparently convinced the Fed that they could take a cautious first step toward trimming the bond purchases.
The minutes “revealed a growing confidence in the economic outlook among members and a broad expectation for stronger growth as fiscal restraint diminishes,” said James Marple, senior economist at TD Economics.
The economy has added an average of 200,000 jobs a month from August through November. And the unemployment rate has reached a five-year low of 7 per cent.
On Friday, the government will release its employment report for December. A private report Wednesday raised expectations for Friday’s government report. Payroll provider ADP said businesses added 238,000 jobs in December, up slightly from 229,000 in the previous month.
Last month the Fed announced that it would reduce its monthly bond purchases from $85 billion to $75 billion starting this month. And it said it expected to further reduce the bond purchases in “measured steps” at upcoming meetings, if the economy and the job market continue improving.
The bond purchases are intended to keep long-term rates low, and encourage more borrowing and spending.
The minutes also revealed that a majority of participants felt the benefits of the bond purchases was likely diminishing, according to a survey taken by the Fed staff. Still, most members said the benefits of the program outweighed the risks, noting that the threat to financial stability was seen as the biggest potential risk.
Many economists believe the Fed could reduce the bond purchases by an additional $10 billion at each of the Fed’s upcoming meetings, if the economy continues to add a healthy number of jobs. At that pace, the Fed would end its program of new purchases by the end of the year.
Michael Gapen, an economist at Barclays Research, said he looked for the final reduction to be a $15 billion trim at the October meeting.
The minutes showed Fed officials were split on the issue of trimming bond purchases. Some favoured a larger initial cut and future reductions that would “bring the program to a close relatively quickly.”
Other officials disagreed. The minutes said that some questioned whether an initial move to slow the bond buys was warranted in December, given that unemployment remained elevated and inflation was running well below the Fed’s 2 per cent target.
Some analysts believe the Fed could go further at upcoming meetings to strengthen its forward guidance about short-term rates now that Janet Yellen has been confirmed as the incoming chairman to succeed Ben Bernanke.
Bernanke will preside at his last meeting on Jan. 28-29, and Yellen will take over on Feb. 1. Yellen was a strong supporter of Bernanke’s aggressive efforts to revive the economy after the Great Recession. Analysts expect no major changes in the direction of policy under Yellen.
Fed interest rate policies are made by the Federal Open Market Committee, which is composed of seven Washington board members and five of the 12 regional bank presidents. The New York Fed president always has a vote on the policy panel. Four other votes rotate annually among the other 11 Fed presidents.
President Barack Obama has the chance to fill four vacancies on the Fed board. Beyond his choice of Yellen to replace Bernanke, Obama has not announced his picks for the other openings. Stanley Fischer, a former economics professor at the Massachusetts Institute of Technology who served until last June as head of the Bank of Israel, has been mentioned as a choice for vice chairman. Lael Brainard, formerly Treasury’s top international official, could be tapped for one of the other openings.