No one should think the U.S. Federal Reserve is enjoying itself.
The minutes of the latest meeting of the U.S. central bank's policy committee are a testament to unease with quantitative easing, the great experiment in monetary policy made necessary by the financial crisis.
Officials agonized at the end of January over how long they should keep the throttle wide open, an expression of doubt that will put upward pressure on the U.S. dollar because traders will be forced to prepare for the greater possibility of tighter interest-rate policy before the end of the year.
The Federal Open Market Committee, or FOMC, on Jan. 30 ultimately decided that the unemployment rate was too high to do anything but continue on with creating $45-billion (U.S.) a month to purchase bonds and mortgage-backed securities.
But they did so only after an apparently fraught debate during which "several" members said the Fed should be prepared to vary the pace of asset purchases, "either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved."
In addition, a "number" of policy makers anticipated that further analysis of quantitative easing would show that the risks associated with manipulating bond yields would become too great, forcing the committee to "taper or end its purchases before it judged that a substantial improvement in the outlook for the labour market had occurred."
That statement is important.
Eleven of the 12 voting members of the FOMC agreed to maintain current policy, and potentially deploy other measures, until the outlook for the labour market improves "substantially." The minutes show that consensus is less than solid. At a minimum, the advocates of quantitative easing are under serious pressure from the skeptics to ease off the stimulus. (There are 19 members on the FOMC, and all of them participate in policy debates, but only 12 actually vote in a given year.)
Paul Ashworth, chief U.S. economist at Capital Economics, a research firm based in London, had assumed a "substantial" improvement in the U.S. labour market amounted to a lowering of the unemployment rate to 7 per cent from its current level of 7.9 per cent.
Now he's not so sure. The minutes also note that "many" of the participants expressed "some concerns about potential costs and risks" from further asset purchases. That falls short as an expression of absolute confidence in the Fed's chosen path.
"If it was one, a few or even several officials, then we could dismiss it as the concerns of the usual hawkish suspects," Mr. Ashworth advised his clients in an analysis of the Fed minutes.
"But `many' implies a majority on the FOMC. Most officials seem to believe that the purchases are still providing a boost to housing and durable consumption via lower interest rates. The key difference is that their perception of the likely costs has increased."
The Fed has purchased more than $3-trillion in bonds and mortgage securities to keep downward pressure on interest rates. That's far more risk than the central bank cares to hold, and chairman Ben Bernanke intends to sell most of those assets once the economy improves. That will be a difficult task, as the Fed risks losses on its portfolio. Continuing to add to that portfolio only will make the job of unwinding it that much harder.
Opponents of quantitative easing also worry about inflation and asset-price bubbles in the bond and housing markets. The minutes suggest those concerns are shared widely, although some – perhaps most – still have bigger concerns. "Several" committee members met the stimulus skeptics with arguments that the potential costs of ending the asset purchase too soon also are "significant," including growth, jobs, and deflation.
U.S. stock markets fell after the minutes were released, a reaction, apparently, to a more-robust-than-expected debate over the costs and benefits of quantitative easing. This should surprise only those in the "QE-to-infinity" school.
But such thinking also underestimated the seriousness with which central bankers have embarked on these untested paths. The Fed isn't on the verge of ending its asset-purchase program. But it's getting ready for the eventual day. In January, the minutes revealed that Mr. Bernanke ordered the Fed staff to prepare "additional analysis" on the efficiency of quantitative easing. The FOMC will review it at its next meeting in March.