Just when it seemed that the future of the Federal Reserve’s bond-buying stimulus program was clearly determined, the Fed once again introduced uncertainty about its plans into the mix.
Minutes from the Fed’s July monetary policy committee meeting released Wednesday suggest that members of the central bank still have not reached a final decision on whether to “taper” the Fed’s $85 billion-a-month bond-buying program in September.
Fed Chairman Ben Bernanke raised the possibility of a September taper in a June press conference in which he sketched out a timeline for winding down the stimulus program beginning this fall. After a July meeting that included no further hints about the program, investors began to plan on a September taper. Sixty-five percent of economists surveyed by Bloomberg said that they expected the Fed to reduce the size of the monthly purchases by $10 billion at the September meeting.
But the minutes show that Fed officials themselves are conflicted about when to begin winding down the program. While “almost all committee members agreed that a change in the purchase program was not yet appropriate” in June, only “a few … suggested that it might soon be time to slow somewhat the pace of purchases,” minutes of the Fed meeting state.
Only one voting member of the Federal Open Market Committee that sets monetary policy, Kansas City Fed President Esther George (who ultimately voted against the July statement), said that the labor market had improved enough to clearly indicate that the taper was coming soon. Others argued against making any changes to the Fed’s program without “being patient and evaluating additional information on the economy.”
And Fed economists are not interested in clarifying the situation any further, according to the minutes: “Generally, however, participants were satisfied that investors had come to understand the data-dependent nature of the committee’s thinking about asset purchases.”
Stock markets had fallen and yields on Treasury bonds had risen after Bernanke initially hinted at the taper in May and then introduced a specific timetable for reducing asset purchases in June. Indexes had regained much of the lost value after other Fed officials clarified that their plans were conditional on the economy continuing to improve, and after Bernanke publicly offered similar assurances.
Stocks and bonds remained mostly unchanged after Wednesday’s minutes came out, despite an initial small sell-off in the Dow Jones Industrial Average and S&P 500. Yields on the 10-year Treasury bill inched up above 2.8 percent.
As of the July meeting, Fed officials felt that market expectations about future Fed policy “appeared well aligned with their own expectations,” according to the minutes. The muted market reaction to the release of the July meeting’s minutes suggest that the market and the Fed remain on the same page — both expect a September taper, though neither thinks it is guaranteed.