Most Federal Reserve policy makers said the central bank was likely to taper its bond purchases this year, even as they
“Most participants viewed their economic projections as broadly consistent with a slowing in the pace of the committee’s purchases of longer-term securities this year and the completion of the program in mid-2014,” according to the record of the Federal Open Market Committee’s Sept. 17-18 gathering, released Wednesday in Washington.
The minutes show a lengthy debate over whether the economy had improved sufficiently to warrant a reduction in the Fed’s $85 billion in monthly bond buying, with several members saying the decision was “a relatively close call.”
The FOMC, acting before the Oct. 1 partial government shutdown, held off tapering bond purchases and indicated that budget cuts and an increase in borrowing costs were drags on the expansion. Policy makers wanted to see more evidence of steady growth to combat 7.3% unemployment, they said in a statement.
“With the markets apparently viewing a cut in purchases as the most likely outcome, it was noted that the postponement of such an announcement to later in the year or beyond could have significant implications for the effectiveness of committee communications,” the minutes said of members who favored reducing purchases.
If the Fed “did not pare back its purchases in these circumstances, it might be difficult to explain a cut in coming months, absent clearly stronger data on the economy and a swift resolution of federal fiscal uncertainties,” according to the minutes.
“Clearly they still want to taper this year and be done in the middle of next year but I don’t know how that’s going to happen now,” said Dan Greenhaus, chief global strategist at BTIG LLC in New York.
“October is off the table, which leaves December, and if the economy acts poorly after the debt ceiling debate then tapering in December will be a hard sell,” he said, referring to FOMC meetings scheduled for Oct. 29-30 and Dec. 17-18. “I don’t think they want to be seen as reducing accommodation amid an increase in fiscal drag and compounding the problem.”
Fed officials who favored maintaining the pace of purchases cited concerns about the effects on the economy from “the tightening in financial conditions in recent months, as well as about the considerable risks surrounding fiscal policy” and viewed recent economic data as “having been on the disappointing side.”
Economists had forecast the FOMC would dial down monthly Treasury purchases by $5 billion, to $40 billion, while maintaining its buying of mortgage-backed securities at $40 billion, according to a Bloomberg survey.
The minutes also show debate over the strategy for winding down purchases, with some members favoring a reduction only in Treasuries.
“A few participants expressed a preference for not cutting MBS purchases but reducing purchases only of Treasury securities initially, with the intent of continuing to support the recovery in the housing sector,” the record showed. “However, the appeal of including both types of securities in any reduction was also mentioned.”
