The U.S. Federal Reserve’s commitment to quantitative easing is shakier than many on Wall Street had come to believe.
Three weeks ago, the Fed’s policy committee opted to replace Operation Twist – the policy of selling shorter-term Treasuries to buy longer-dated ones – with quantitative easing, or QE, pledging to create new money to buy U.S. government debt at a pace of $45-billion (U.S.) a month starting in January.
All but one of the 10 voting members of the Federal Open Market Committee endorsed the shift. But the minutes of that meeting, released Thursday in Washington, suggest many did so reluctantly.
“While almost all members thought that the asset purchase program begun in September has been effective and supportive of growth, they also generally saw that the benefits of ongoing purchases were uncertain and that the potential costs could rise as the size of the balance sheet increased,” the minutes read.
The report says “several” committee members said it could be necessary to slow or stop asset purchases “well before the end of 2013,” citing concerns over the size of the Fed’s investment portfolio and financial stability.
At a news conference at the end of the policy meeting last month, Fed chairman Ben Bernanke indicated wariness about buying bonds without limit, as the risk to destabilizing the financial system could eventually outweigh any benefits from lower interest rates. But the minutes suggest the level of concern is broader than was evident at the time. The yield on 10-year Treasuries rose after the minutes were published, suggesting bond traders quickly are adjusting their outlook for Fed policy.
“This further supports our contention that many members are growing increasingly uneasy as the Fed proceeds through uncharted territory with a continuation of long-term unconventional monetary policy,” Adrian Miller, director of fixed-income strategy at GMP Securities in New York, told clients in a note on the minutes.
For those who think central bankers have lost their minds, the tone of the minutes should offer a little comfort: the Fed is proceeding with great caution. Policy makers debated how further asset purchases would make unwinding their crisis programs increasingly difficult, and how their efforts risked inflating new asset bubbles. Officials even discussed how purchasing certain assets would affect the markets for other securities. It appears one of the reasons the Fed opted to buy longer-term Treasuries is that the market is so deep that it can’t be overly manipulated by Fed policy.
Now, it would be going too far to interpret the minutes of the December meeting as evidence that QE is about to come to an abrupt end. The Fed’s stated policy is to continue buying Treasuries and mortgage-backed securities (at a pace of $40-billion a month) until the outlook for the labour market changes “substantially.” A “few” members stated the Fed would need to continue with QE through the end of 2013, and a “few” others underlined the need for “considerable policy accommodation” without providing a timeline for purchases.
Still, the minutes are a jolt to any market participant who thought the Fed was on cruise control, albeit at a speed in excess of posted limits. Mr. Bernanke could be getting ready to touch the brakes.