Fed shock decision not to taper QE was 'close call': minutes

Fed shock decision not to taper QE was 'close call': minutes

The Federal Reserve's shock decision last month not to reduce its support for the U.S. economy was a "relatively close call" for policymakers, according to minutes of the meeting that also showed there was still broad support to trim bond-buying this year, Reuters reported.

Since last month's meeting, the outlook for scaling back bond purchases has grown cloudier.

A budget battle in Washington hit a stalemate and forced a partial government shutdown that started this month, threatening economic growth and depriving the Fed of official economic data to drive its decisions.

The minutes of the Fed's September 17-18 meeting, released on Wednesday, clearly showed top officials were concerned their decision to keep buying $85 billion in bonds each month could muddle their messaging with investors who largely expected a reduction.

At the conclusion of the much-anticipated meeting, the decision of the Fed's policy-setting Federal Open Market Committee sparked a global stock market rally and depressed the U.S. dollar.

"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 said of the 10 voting FOMC members.

Referring to the broader group of 17 Fed policymakers, the minutes said, "most participants judged that it would likely be appropriate to begin to reduce the pace of the Committee's purchases of longer-term securities this year and to conclude purchases in the middle of 2014."

Now that the government shutdown has entered its ninth day, whether policymakers continue to back tapering this year is an open question.

"The political landscape has undoubtedly worsened," said Jacob Oubina, senior U.S. economist, RBC Capital Markets, New York. "Recent talk from Fed speakers and the political situation should push tapering out until 2014."

In June, Fed Chairman Ben Bernanke primed markets to expect a cut to the quantitative easing program (QE) when he said the central bank expected to make its first policy move later this year. Yields on U.S. Treasury bonds then mostly rose through the summer in anticipation of a September cut.

The minutes, which briefly lifted U.S. stocks to session highs on Wednesday, said Fed policymakers raised concerns about "the effectiveness of FOMC communications if the Committee did not take that step."

They also worried it might be difficult to explain a cut to QE "in coming months absent clearly stronger data on the economy and a swift resolution of federal fiscal uncertainties," the minutes show.

After the September meeting, Bernanke said the Fed wanted to see more evidence of solid economic growth before trimming the bond-buying, which was launched a year ago and is meant to spur investment, hiring and economic growth.

Bernanke also emphasized policymakers were not on a preset course to reduce the program this year, but would do so only if the job market improved.

U.S. President Barack Obama on Wednesday nominated Fed Vice Chair Janet Yellen to succeed current Fed Chairman Ben Bernanke, in a move that investors welcomed because it suggests policy continuity.

But the minutes underscored how deeply divided policymakers are, and may yet be if Yellen is confirmed by the Senate as expected and takes the seat at the head of the policy-setting table early next year. On Wednesday, she said it was important that Fed policymakers "vigorously debate, then unite" behind any given policy response.

The minutes, in typical dry tones, spotlighted the vigor of the debate, if not the unity of the response.

Some members pointed to mixed economic data, low inflation, and uncertainty over fiscal policy to back their preference "to await more evidence that their expectation of continuing improvement would be realized" before proceeding with a reduction in bond purchases.

Other participants in the discussion, including non-voting members, interpreted the data as consistent with an improving labor market, and urged a small reduction in bond-buying to follow through with Bernanke's signaled plan. A few of those said they preferred to scale back Treasuries purchases, which make up $45 billion of the monthly buying program.

Since October 1, when the government shutdown began, the Fed's ability to gauge the state of the economy has been somewhat impaired. For instance the latest read on the nation's unemployment rate, 7.3 percent, dates from August; September's figure would normally have been released last week.

The standoff also threatens to slow the economy further as government workers lose income and investors fret about whether lawmakers will precipitate a national debt default if they do not raise the U.S. debt limit by October 17, when the government is expected to run out of money to pay its bills.

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