Record shows Fed closer to tapering

Federal Reserve officials signaled they may taper their $85 billion in monthly bond buying “in coming months” if the economy improves as anticipated.

Policy makers “generally expected that the data would prove consistent with the committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months,” according to the record of the Federal Open Market Committee’s Oct. 29-30 gathering, released Wednesday in Washington.

Stocks and bonds fell at the prospect the FOMC may reduce asset purchases sooner than expected. The Standard & Poor’s 500 Index fell 0.4 percent to 1,781.37, while the yield on the 10-year Treasury climbed 0.09 percentage point to 2.8 percent in New York trading Wednesday, the highest since Sept. 17.

“It sounds like they’re moving closer to tapering” bond buying, said Sam Coffin, an economist at UBS Securities in New York. “There’s a lot more focus on their forward guidance and a lot of that is because if they’re moving closer to tapering they want to signal they’ll stay easy after the tapering has begun.”

The FOMC minutes show extensive discussion on how to increase the clarity of their plans to hold interest rates near zero. They made no decisions on those plans.

“There’s still a ton of ideas but it doesn’t seem like the committee is coalescing around a single path of action just yet,” said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut, and a former Richmond Fed researcher.

As the Fed moves closer to scaling back stimulus, central bankers in Japan and Europe are under pressure to combat deflationary risks. The Bank of Japan will probably have to postpone its original 2015 time frame for achieving 2 percent inflation, according to 22 of 37 economists surveyed by Bloomberg News.

In Europe, where policy makers are confronted with a Japan-like threat of deflation, officials are considering a new tool - a negative interest rate for commercial lenders who park excess cash at the European Central Bank. The ECB is discussing a cut of less than the typical quarter percentage point magnitude, two people with knowledge of the debate say.

The Fed minutes show policy makers discussed whether to cut the interest rate the Fed pays on excess reserves, currently 0.25 percent. Janet Yellen, the vice chairman and the nominee to replace Chairman Ben S. Bernanke, whose term expires in January, told lawmakers last week doing so “certainly is a possibility” even as some Fed officials have been concerned that lowering the rate would damage the money market.

Most participants said lowering the rate “could be worth considering at some stage, although the benefits of such a step were generally seen as likely to be small except possibly as a signal of policy intentions,” according to the minutes.

Officials debated how to clarify or strengthen their communication about the economic thresholds guiding how long interest rates will stay low. The committee has said it will hold rates near zero at least as long as unemployment remains above 6.5 percent and inflation looks subdued.

A couple of FOMC members supported reducing the threshold below its current level of 6.5 percent, while others said such a move may raise concerns about the Fed’s commitment to the thresholds. Several said it “could be more helpful” to better explain their intentions for the federal funds rate after the jobless rate falls to 6.5 percent, the minutes said.

The FOMC has pledged to press on with so-called quantitative easing until seeing substantial improvement in the outlook for the labor market. Employers added 204,000 workers to payrolls in October, more than forecast by economists, and the unemployment rate has fallen to 7.3 percent from the 8.1 percent rate the month before the central bank began a third round of bond buying in September 2012.

Bloomberg