Minutes: Federal Reserve split on bond program
WASHINGTON — Nearly every member of the Federal Reserve thought last month that the central bank should see more evidence that the economy was improving before slowing its bond purchases. But worries about whether a delay would confuse financial markets made the decision a “close call.”
Minutes of the Fed's Sept. 17 and 18 meetings released on Wednesday show that the Fed wrestled with the decision, even though the panel ended up voting 9-1 to keep the purchases at the current level of $85 billion a month.
The bond purchases are intended to keep long-term interest rates low to encourage more borrowing and spending.
According to the minutes, all members but one wanted to see more data before reducing the purchases. And several noted potential risks to the economy, including a job market that had weakened over the summer, higher interest rates and a looming budget impasse in Washington.
Still, some raised concerns that inaction would undermine the Fed's ability to communicate its next steps. Many economists had predicted some reduction in the purchases. And some Fed members made comments before the meeting that suggested such a move was likely.
“For several members, the various considerations made the decision to maintain an unchanged pace of asset purchases at this meeting a relatively close call,” the minutes stated.
Most members indicated that they could still reduce the purchases later this year and end them next year, based on a summary of their economic projections. But those forecasts were made before the budget impasse led to a partial government shutdown this month. Many economists now believe the Fed will continue the current level of bond purchases into next year.
The Fed released the minutes shortly before President Obama formally nominated Janet Yellen, the Federal Reserve's vice chair, to replace Ben Bernanke as chairman. If confirmed by the Senate, Yellen would take over at a critical time for the economy and the Fed's policies.
A prolonged shutdown likely would slow economic growth further. And if Congress fails to raise the $16.7 trillion borrowing limit this month, the United States could default on its debt for the first time. That would push up interest rates, disrupt global financial markets and possibly push the nation's economy back into recession.
Analysts predict economic growth slowed in the July-September quarter to an annual rate of 2 percent or less. Many had thought that growth would accelerate in the final three months of the year to a rate above 2.5 percent. But with each day the government stays shuttered, growth is likely to weaken a little more.
The shutdown has delayed key economic reports, including the September employment report that was due last week. Without those reports, the Fed will have trouble getting a read on whether the economy and job market have made progress since it last met. That is another reason economists expect the Fed will wait until next year to slow its stimulus.
The Labor Department reported last week that unemployment benefits still are hovering near six-year lows. And average rates on fixed mortgages have fallen for three straight weeks to their lowest level in three months, in part because the Fed opted to continue buying bonds at its current pace.