Looking for a firm idea of when the Federal Reserve might shift gears? Sorry, it isn't ready to provide that guidance.
At their Oct. 29-30 meeting, Fed policymakers tried to decide how to begin reversing extraordinary measures put in place in response to the financial crisis. Newly released minutes from the meeting provide nothing more specific than that a downshift in asset purchases could be called for "in coming months."
Why the lack of clarity? John Canally, chief economist with LPL Financial, says "It's all muddled up because we've never been down this road before." Amid the uncertainty along the uncharted road, Canally says the result could be "some volatility and hiccups in markets."
The latest Bloomberg Global Poll found that "four of five investors expect the Federal Reserve to delay a decision to begin reducing its bond buying until March 2014 or later," Bloomberg reports. The pace of asset purchases has been stuck at $85 billion a month.
Such a shift as early as March would likely come during Janet Yellen's first meeting as Fed chair. That assumes she is confirmed by the Senate as expected. Chairman Ben Bernanke's term ends in late January.
The minutes say members of the Federal Open Market Committee generally agreed "there had been little change in the economic outlook since the September meeting." All but one thought "it would be appropriate for the Committee to await more evidence that progress toward its economic objectives would be sustained before adjusting the pace of asset purchases." Some members considered when it might be appropriate to wind down bond buying "before an unambiguous further improvement in the outlook as apparent."
There's concern that the Fed is causing bubbles, which is something easy to fear but hard to prove. Economist Paul Edelstein at IHS Global Insight said in a note, in response to the minutes, that "the view that quantitative easing is creating financial excesses isn’t shared by all Fed officials, particularly Janet Yellen."
One dissenting FOMC member thought the economy had improved enough that "the continued easing of monetary policy at the current pace was no longer necessary." It is a pretty good bet that member is Esther George, President of the Federal Reserve Bank of Kansas City, who voted against the committee's actions. The minutes say she noted "cumulative progress" in the job market.
"A couple of participants" spoke in favor of reducing the current 6.5 percent unemployment rate threshold for raising the benchmark federal funds rate. Others said that would cause a problem regarding the view of the "durability" of the group's commitment to the threshold. In other words, that would raise a question about the Fed's ability to stick to its word.
The Fed likely wants to see improvement in the coming monthly jobs reports before deciding to throttle back. There is also another looming series of federal budget deadlines in the coming months, although FOMC members "saw the economic effects of the partial shutdown of the federal government as temporary and limited."
Canally notes that economists generally look for growth slightly above 2.6 percent next year, which would reflect less drag from federal and state governments.
We also learned that the FOMC held a video conference Oct. 16, which was the day before the risk of a U.S. default. The minutes say those in the meeting agreed that "a delay in payments on Treasury securities would be potentially catastrophic, and thus such a situation should be avoided at all costs."
Congress and President Barack Obama were able to forge an agreement before the deadline.
What do you think the Fed plans on doing in the coming months?
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