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In last summer's speech in Jackson's Hole, Wyo., Federal Reserve chairman Ben Bernanke outlined the risks of quantitative easing and defended the central bank's policies. Six months later, some members of the Federal Open Market Committee may be feeling that the risks are beginning to outweigh the benefits, according to the minutes of the last FOMC meeting.
The committee met on Jan. 29 and 30 and decided to continue purchasing $40 billion of agency mortgage-backed securities per month and $45 billion of longer-term Treasuries per month.
The minutes show that most of the participants believe the asset purchases have eased financial conditions and kept inflation in check. Though the loose monetary policy also is aimed at improving the outlook for unemployment, "many participants also expressed some concerns about the potential costs and risks arising from further asset purchases," the minutes show.
Among the other risks discussed:
- Possible complications when it's time to remove policy accommodation.
- Inflation.
- Market behavior that could undermine financial stability, including excessive risk-taking.
- A large portfolio of long-duration assets could expose the Fed to capital losses.
As a result, members of the FOMC were asked for more analysis going into future meetings. Also of note, "one participant argued that purchases should vary incrementally from meeting to meeting in response to incoming information about the economy."
The group also debated the risks of ending the purchases too soon and more than one participant judged that thinking about the risks too much could lead them to end the program before the stated goals were achieved -- clearly a drawback to any risky endeavor.
From the minutes:
A number of participants stated that an ongoing evaluation of the efficacy, costs and risks of asset purchases might well lead the committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred.
Communications
Under Bernanke's leadership, the central bank has become more transparent than ever. Rather than obliquely communicating intentions toward rates, the new forward guidance spells out exactly what the Fed is looking for before considering a tighter monetary policy.
The committee is looking for new ways to communicate the collective judgment in the group through the Summary of Economic Projections, released five times per year. According to the minutes, the future may hold more information about the individual participants' opinions on the evolution of the Fed's balance sheet in addition to the projected path of interest rates and timetable for rate increases.
What do you think the FOMC will do about interest rates at its next meeting?
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