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Fed may be on track to slow bond buys

Thu., Aug. 22, 2013

WASHINGTON – The Federal Reserve appears on track to slow its bond purchases by the end of this year if the economy continues to improve. But it remains divided over the exact timing of the move.

That’s the message from the minutes of the Fed’s July 30-31 meeting released Wednesday.

A few policymakers said they wanted to assess more economic data before deciding when to scale back the central bank’s $85 billion a month in Treasury and mortgage bond purchases. These policymakers “emphasized the importance of being patient,” the minutes said.

Others said it “might soon be time” to slow the purchases, which have helped keep long-term borrowing rates near record lows.

“There’s more debating than deciding,” said Michael Hanson, senior economist at Bank of America Merrill Lynch. “We didn’t get a strong indication that the committee broadly is prepared to taper in September.”

Nor did the minutes give any indication of how fast the Fed would scale back its purchases once it begins – or whether it would cut back equally on Treasury and mortgage bond buying.

Since the July policy meeting, a few Fed officials have suggested that the central bank could slow the bond buying as soon as September. By then, updated reports on U.S. employment and economic growth will have been issued.

The Fed is considered most likely to slow its bond buying after its September or December policy meeting because after each one, Chairman Ben Bernanke will hold a news conference and could explain such a major step.

Stocks have fallen on speculation that the Fed is moving closer to pulling back on the bond buying.

The yield on the 10-year Treasury note has surged about three-quarters of a percentage point, lifting rates on mortgages and other loans. The average rate on a 30-year mortgage has risen about a full point since May to 4.4 percent.

The minutes released Wednesday show that Fed policymakers agreed that they won’t raise the short-term interest rate they control from a record low near zero at least until the unemployment rate falls to 6.5 percent. Several members even said they were willing to lower that threshold.

The release of the minutes initially rattled Wall Street as investors digested Fed members’ thoughts on the bond purchases, their short-term rate policy and their characterization of the economy.

The Dow Jones industrial average had been down about 50 points before the minutes were released at 2 p.m. EDT. It fell more than 100 points afterward, recovered all its losses, and then fell again in late afternoon to close down 105 points on the day. Other indexes were just as volatile before ending the day down.

Bond yields increased, though. The yield on the 10-year Treasury note rose to 2.86 percent from 2.81 just before the minutes were released.

The minutes showed that some policymakers were less confident than they were at their June meeting that economic growth will pick up later this year. They cited higher mortgage rates, slower growth overseas and the potential for continuing cuts in government spending as the main reasons.

But several said they thought the housing market would continue to recover despite higher rates. If so, that would provide an important boost to the economy. Those Fed officials, who aren’t identified, said banks have become more willing to provide mortgage loans, consumer confidence has increased and mortgage rates are still low by historical standards.

Fed officials generally agreed that the risks of an economic downturn have diminished since the Fed began the bond purchases in September.

Since the meeting, the data on the job market have been mixed.

Employers added 162,000 jobs in July. That was the fewest in four months. Still, the economy has created an average of 192,000 jobs a month this year, slightly ahead of last year’s pace.


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