Wednesday, July 10, 2013

Many on Fed want further jobs improvement before tapering QE

By Joshua Zumbrun and Craig Torres

Many Federal Reserve officials want to see more signs employment is picking up before they’ll begin slowing the pace of $85 billion in monthly bond purchases, according to minutes of policy makers’ last meeting.

“Many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases,” according to the record of the Federal Open Market Committee’s June 18-19 gathering released today in Washington.

Today’s minutes said “several members judged that a reduction in asset purchases would likely soon be warranted.” Those members said the “cumulative decline in unemployment since the September meeting and ongoing increases in private payrolls” had increased their confidence that the labor market had improved, the minutes showed.

Chairman Ben S. Bernanke said in a press conference after the meeting that the Fed may trim its bond-buying program this year and halt it around mid-2014 if economic performance tracks the central bank’s forecast. The minutes show officials want to see that forecast confirmed before tapering their purchases.

Not all members agree on when to begin slowing the pace of purchases. Some on the panel “need to see more evidence that the projected acceleration in economic activity would occur, before reducing the pace of asset purchases,” according to the minutes.

Stocks Rise

Stocks rose and bond yields fell after the release of the minutes. The Standard & Poor’s 500 Index rose 0.1% to 1,654.57 at 2:06 p.m. in New York, while the yield on the 10- year Treasury note fell to 2.64% from as high as 2.67% earlier in the day.

The minutes refer to the 12 voting policy makers as “members” and the entire 19-person policy making group as “participants.” Only five of the 12 regional Fed presidents have a vote in any given year.

In a discussion about the appropriate path of the balance sheet among the 19 FOMC participants, “about half” indicated “it likely would be appropriate to end asset purchases late this year,” the minutes said. “Many other participants anticipated that it likely would be appropriate to continue purchases into 2014,” the minutes said, while “a few” wanted to slow or stop the purchases at the June meeting.

St. Louis Fed President James Bullard dissented from the Fed’s statement in June, saying that in light of low readings on inflation the committee should “signal more strongly its willingness to defend its goal of 2% inflation.”

‘Watching Closely’

The minutes show that “many others worried about the low level of inflation, and a number indicated that they would be watching closely for signs that the shift down in inflation might persist or that inflation expectations were persistently moving lower.”

Fed officials speaking since the meeting have sought to clarify Bernanke’s June 19 remarks after his timetable for slowing the pace for unprecedented stimulus triggered a surge in interest rates. The yield on the 10-year Treasury climbed to 2.74% on July 5 from 2.19% the day before Bernanke spoke, while the national average for the 30-year fixed-rate mortgage rose to as high as 4.46% on June 27 from as low as 3.35% in May.

Federal Reserve Bank of New York President William C. Dudley said on June 27 that the central bank may prolong its asset-purchase program if the economy falls short of policy makers’ expectations. Fed Governor Jerome Powell and Atlanta Fed President Dennis Lockhart, speaking on the same day, sought to damp expectations the central bank will increase the target interest rate sooner than previously forecast.

Clarify Approach

Bernanke has an opportunity to clarify his approach to bond buying in a speech scheduled for 4:10 p.m. today in Boston and titled, “A Century of U.S. Central Banking: Goals, Frameworks, Accountability.”

The 59-year-old Fed chief has engineered several unorthodox programs to revive credit and economic growth amid the worst recession since the Great Depression. The Fed cut its target interest rate to near zero in December 2008 and has pledged to hold it there as long as the unemployment rate remains above 6.5% and the outlook for inflation doesn’t exceed 2.5%.

The Fed began purchasing $40 billion a month of mortgage backed securities in September and announced $45 billion a month of Treasury purchases in December. The program, known as QE3 for the Fed’s third round of quantitative easing, has expanded the central bank’s balance sheet to a record $3.49 trillion.

Exceeded Expectations

Fed officials met before the Labor Department’s jobs report for the month of June exceeded expectations, with the economy adding 195,000 jobs and the unemployment rate unchanged at 7.6%.

The July 5 report reinforced speculation the Fed may reduce its pace of purchases as soon as September. Economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co. said after release of the employment data that the Fed will begin tapering its purchases sooner than they had projected.

Bernanke said tapering depends on whether the economy strengthens in the second half of 2013 and aligns with central bank forecasts released at the end of the June FOMC meeting. The predictions are sunnier than those of Wall Street.

Fed officials predict the economy will grow 2.3% to 2.6% this year and 3% to 3.5% in 2014, while the median estimate of economists in a Bloomberg survey is for 1.9% growth in 2013 and 2.7% in 2014.

Budget Cuts

Tax increases and automatic federal budget cuts are inhibiting growth this year. Those cuts led to furloughs of the U.S. military’s civilian workers that began this week. The move means a reduction equivalent to 11 days pay for as many as 651,542 employees through Sept. 30, according to Pentagon figures. The furloughs are the latest step in automatic budget cuts, known as sequestration.

Growth in the U.S. was less than originally estimated in the first quarter of the year after an increase in the U.S. payroll tax took a bigger bite out of consumer spending than previously calculated in Department of Commerce reports. The economy grew 1.8% in the first quarter, down from a prior reading of 2.4%, according to a June 26 report.

At the same time, policy makers including Bernanke and Dudley have remarked about how a housing rebound is aiding the expansion. Home values in 20 U.S. cities rose 12.1% in the year through April, the biggest annual gain since 2006, according to an S&P/Case-Shiller index. Sales of new houses in May climbed to the highest level in almost five years.

The housing recovery will probably continue even as mortgage rates rise, Jeffrey Mezger, the president of KB Home, the best-performing U.S. homebuilder stock this year, said in a June 27 earnings call.

“If the economy continues to expand like it is, I think you’ll see the banks loosen up,” Mezger said. “And so if rates go up a little bit, but underwriting loosens up a bit, I think you’ll see similar demand, if not more. That’s why we’re not troubled by a little uptick in interest rates right now.”

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