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Wednesday, Feb 20, 2013 8:45 PM UTC

Fed minutes show concerns about bond purchases

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Topics: From the Wires,

WASHINGTON (AP) — Several Federal Reserve policymakers were concerned last month about the risks of the Fed’s efforts to boost the U.S. economy by keeping borrowing costs low for the foreseeable future.

Minutes of the Fed’s Jan. 29-30 policy meeting released Wednesday showed that some officials worried about the Fed’s monthly purchases of $85 billion in Treasurys and mortgage bonds. They expressed concern that the continued purchases could eventually escalate inflation, unsettle financial markets or cause the Fed to absorb losses once it begins selling its investments.

In the end, the Fed voted 11-1 last month to keep its bond-buying program open-ended and at the same size. It said in a statement that the purchases would continue until the job market improved substantially. The bond purchases are intended to keep interest rates down to encourage borrowing and spending.

Still, the January minutes suggested that the discussion over the risks from the bond purchases was more extensive than at the Fed’s December meeting. Minutes of the December meeting had also pointed to divisions among Fed officials over how long the purchases should continue. The debate within the Fed has fed speculation that the bond purchases might be scaled back or ended altogether this year.

Stock prices fell Wednesday after the release of the minutes. The prospect of higher interest rates could hurt corporate profits and stock prices over time.

The minutes showed that “several participants” thought the Fed should be ready to vary the pace of its purchases as it adjusts its view of the economy or the benefits and costs of the purchases. The policymakers asked Fed staffers to provide a deeper analysis at upcoming meetings of the issues raised in the discussion.

According to the minutes, some Fed officials thought an ongoing assessment of the bond purchases might cause the committee to slow or end its purchases “before it judged that a substantial improvement in the outlook for the labor market has occurred.”

Private economists seemed divided Wednesday over how to interpret the debate described in the Fed’s minutes.

Some pointed to the Fed’s lopsided 11-1 vote last month for the current level of bond purchases as a sign that Chairman Ben Bernanke commands a large majority for keeping the monthly purchases at $85 billion until the job market strengthens significantly.

Other analysts said the extensive discussion of the purchases at last month’s policy meeting signaled rising concern about the risks of continuing the bond-buying program.

Paul Ashworth, chief U.S. economist at Capital Economics, said he had assumed that the current purchase level would continue into the first half of next year.

“There is now a big question mark around that view,” Ashworth said.

After reading the minutes, Ashworth said he thought it was possible that the Fed will decide to scale back its purchases as early as its next meeting, March 19-20. Bernanke may provide more guidance when he gives the Fed’s twice-a-year economic report to Congress next week.

The Fed is embarked on its third round of bond purchases. Unlike the previous rounds, the latest effort is open-ended: The Fed has said it will keep buying bonds until it sees substantial improvement in the job market. It also plans to keep a key short-term interest rate at a record low at least until the unemployment rate falls below 6.5 percent. The rate is now 7.9 percent.

The lone dissenter in the Fed’s vote last month to continue its current policies was Esther George, president of the Fed’s Kansas City regional bank.

The minutes noted that officials thought the economy was showing signs of modest improvement at the start of 2013. Policymakers observed that the job market had been improving gradually and that super-low interest rates had helped boost sales of autos and other consumer products.

But Fed officials also cautioned that threats remained. They pointed to possible economic disruptions from budget debates in Washington, including the scheduled start of across-the-board spending cuts on March 1 — cuts that could slow the economy’s growth.

More By Martin Crutsinger.

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