Timing of cutback to Fed stimulus still unclear

Agence France-Presse

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With turmoil sweeping markets in emerging economies over the prospect of tighter supplies of the US dollar, the minutes confirmed the Fed's intention to begin pulling back on its $85 billion a month bond purchases

Federal Reserve Chairman Ben Bernanke file photo by AFP

WASHINGTON DC, USA – The timing of the Federal Reserve’s plan to reduce its stimulus program remained unclear Wednesday, August 21, after minutes of its last policy meeting showed divisions over the strength of economic growth.

With turmoil sweeping markets in emerging economies over the prospect of tighter supplies of the US dollar, the minutes confirmed the Fed’s intention to begin pulling back on its $85 billion a month bond purchases.

But differences between members of the policy-making Federal Open Market Committee (FOMC) over the strength of US economic growth raised doubts over whether the pullback would begin as early as next month.

Some policy-makers at the July 30-31 FOMC meeting believed that “it might soon be time to slow somewhat the pace” of the bond purchases, aimed at holding interest rates down, according to the minutes.

Yet others in the group emphasized “the importance of being patient”, revealing concerns about whether the economy will pick up pace as expected in the second half of this year, the minutes showed.

Even so, together the Fed’s policy-makers agreed at the meeting to reiterate their commitment to reeling in the stimulus in the coming months, a message that has driven up interest rates and exacerbated capital flight from countries like India, Turkey and Indonesia already facing sharp economic slowdowns.

After the FOMC’s June meeting, Fed chief Ben Bernanke announced that they expected to begin cutting the bond purchases sometime late this year and wind up the program in total by mid-2014, as long as the economy kept improving.

That timeline was left in place after the July FOMC meeting.

But the minutes to the meeting revealed an ongoing tentativeness about that commitment, rooted in a divergence of opinions on how strong economic growth is.

The 12 FOMC voting members and five alternates were “generally” confident in forecasts that the economy would pick up speed later this year and accelerate in 2014.

But “a number” were worried that government spending cuts could hold back growth, and that higher interest rates — from market expectations that tighter money conditions are indeed nigh — will dampen the rebound in the housing industry.

Moreover, some questioned what the recent fall in the unemployment rate said about the strength of the jobs market.

“The employment-to population ratio, together with a high incidence of workers being employed part time for economic reasons, were generally seen as indicating that overall labor market conditions remained weak,” the minutes said.

Analysts said there was no clear signal as to whether the FOMC was expecting to begin cutting the bond buying as soon as its September 17-18 meeting, or wait until October or its final meeting of the year, in December.

But some interpreted a bias toward a move later in the year.

“The majority of financial market participants is currently expecting that the Federal Reserve will announce the tapering of its asset purchase program at the upcoming meeting, in mid-September,” said Harm Bandholz of UniCredit.

“At the same time, the Fed might still be a bit farther away from changing the forward guidance than I thought so far,” he added.

“The committee turned a bit more bearish on the state of the economic recovery,” said economist Paul Edelstein at IHS Global Insight.

“As such, we don’t expect tapering at the September meeting.”

US stock markets and the dollar whiplashed in reaction to the release. The S&P 500 ultimately closed lower, down 0.58 percent at 1,642.80. The dollar rose modestly to 97.44 yen and the euro slipped to $1.3357.

The minutes showed the members of the FOMC sensitive to market reactions to its pronouncements, after expectations of a tapering in the bond purchases drove up Treasury bond yields sharply in the past four months.

“However, participants were satisfied that investors had come to understand the data-dependent nature of the Committee’s thinking about asset purchases,” the minutes said. – Rappler.com

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