WASHINGTON (2/21/22)--The Federal Reserve's monetary policymaking body, the Federal Open Markets Committee (FOMC), debated at its Jan. 29-30 meeting on when to scale down the third round of the central bank's additional bond asset purchases program, known as quantitative easing or QE3.
The minutes of the FOMC meeting, released Wednesday, said the committee discussed the possible benefits and costs of additional asset purchases. These purchases involve $85 million in monthly bond purchases--$45 million a month of Treasuries and $40 billion in mortgage debt with no limit as to size of purchases and their duration. At its January meeting, the FOMC voted to continue this policy and to keep the targeted Fed funds interest rate near 0% at least as long as unemployment remained more than 6.5% and inflation was projected at no more than 2.5%.
According to the minutes, most committee members commented this policy has eased financial conditions, helped stimulate economic activity, and helped keep inflation closer to the Fed's longer-run goal of 2%.
"However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases," according to the minutes. Several discussed "the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability," said the minutes.
"Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy," the minutes continued.
"A few" committee members also raised concerns about potential effects of further asset purchases on the functioning of certain financial markets, although others noted little evidence to date of such effects. The committee asked Fed staff for additional analysis ahead of future meetings.
Also of note: Several emphasized the FOMC "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." The minutes indicated that "a number of participants said the ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred."
A few committee members warned that in the past when policymakers had prematurely removed accommodation, there were "adverse effects" on economic growth, employment and price stability.
The committee also discussed the economic thresholds in its forward guidance on the path of the federal funds rate and noted that financial markets had adapted to the Fed's shift from data-based communication to guidance based on economic thresholds. A couple of committee members expressed that the policy tool would be more effective in the FOMC could communicate a consensus expectation for the fed funds path after a threshold was crossed.
To read the full minutes, use the link.