Fed reduced bond buys after job gains
WASHINGTON – The Federal Reserve agreed last month to modestly reduce its bond purchases because of improvements in the job market 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 some participants worried 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 percent, as long as inflation stayed low.
Some members wanted to lower that unemployment threshold to 6 percent, but the majority opposed doing so.
They favored assessing a range of measures of the job market – not just the unemployment rate – in making any policy changes.
The economy has added an average of 200,000 jobs a month from August through November. The unemployment rate has reached a five-year low of 7 percent.
Last month the Fed announced 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.
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.
The minutes showed Fed officials were split on the issue of trimming bond purchases. Some favored a larger initial cut and future reductions that would “bring the program to a close relatively quickly.”
Other officials disagreed. The minutes said 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 percent 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 Jan. 28-29, and Yellen will take over 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.