US Federal Reserve Increasingly Divided Over QE3
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Despite maintaining aggressive stimulus measures that have been credited with aiding economic recovery, minutes from December’s Federal Reserve meeting show that officials are increasing split over when to halt the central bank’s controversial bond buying policy.
Despite maintaining aggressive stimulus measures that have been credited with aiding economic recovery, minutes from December’s Federal Reserve meeting show that officials are increasing split over when to halt the central bank’s controversial bond buying policy.
In what came as a surprise, minutes from the Fed’s December policy meeting, published on Thursday, showed a growing reticence about further increases in the central bank’s $2.92 trillion balance sheet, which it expanded sharply in response to the financial crises and recession in 2007 – 2009.
In particular, officials are split on whether to keep buying assets until the end of 2013, according to the minutes of their December meeting.
Under the QE3 programme, launched last September, the Fed has been buying long-dated Treasury and mortgage-backed securities to drive down long-term interest rates and stimulate the sluggish economic recovery.
But with purchases running at a rate of $85 billion a month for the rest of 2013, the Fed’s balance sheet is expected to grow by $1 trillion this year. Among other things, officials are worried that Fed’s large and growing balance sheet could make it hard to tighten credit down the road if inflation heats up, while potentially distorting financial markets and providing less kick to growth.
“Several (officials) thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet,” the minutes said, referring to the narrower group of voting Fed members.
Related Story: Hard To Be Easing – Why QE3 Cannot Prevent a Fiscal Drag: Nouriel Roubini
Michael Feroli, chief U.S. economist at JPMorgan Chase, said:
[quote] It does sound like they are having a little bit of a gut check. Maybe they stared into the abyss and didn’t like the prospect of a $5 to $6 trillion balance sheet. [/quote]
At a press conference in December, chairman of the Federal Reserve Ben Bernanke indicated that the bank will persist with its controversial monthly bond-buying programme until a “substantial improvement in the outlook for the labour market” is observed.
While the Fed has not defined what a “substantial improvement” would look like, it forecasts unemployment will be between 7.4 and 7.7 per cent at the end of 2013, suggesting that might be enough to bring QE3 to a halt. The unemployment rate stood at 7.7 percent in November.
Mark Zandi, chief economist at Moody’s Analytics, said:
[quote] Everybody at the Federal Reserve is still on very high alert. We are not out of the woods yet. The fiscal brinksmanship is not over. [/quote]
Related News: Infographic: The Controversy Surrounding The US Federal Reserve System
