FOMC divided on when to end purchases

21 Feb

The minutes of the FOMC Jan 29-30 meeting show divided opinion on when to end asset purchases.

A ‘number’ of participants believe the costs of QE would materialize before the benefits, while ‘several’ participants argue that the risks of ending QE prematurely are very high.

End sooner?

The debate does raise important questions as an early scaling back of QE could materially affect a number of markets. Bond yields and mortgage rates are at or near historical lows, aiding businesses requiring financing and home owners who can refinance mortgages or purchase properties very cheaply. This ultimately helps drive a recovery in the housing market, a vital component to the health of the economy . Equity markets have also rallied significantly, boosting consumer confidence and sparking a revival in M&A, as seen recently by Mr Buffet’s recent acquisition of Heinz.

Maintain asset purchases until unemployment drops?

The ‘cost’ of QE, raised by a number of the committee, refers to the impact on future inflation that printing money is likely to have.

US inflation at 1.7%, at first, should not cause great concern. But the FOMC participants know how quickly expectations can change if central banks are seen to be irresponsible with regards to price stability, a significant objective of the Fed’s monetary policy.

It seems the Fed is stuck between a rock and a hard place and the debate will continue for some time yet. Participants will ultimately be forced to make the least worst decision.

Given Mr Bernanke’s lifelong focus on analysing the causes of the great depression, it would be a great surprise if the Fed did prematurely end asset purchases. QE, after all, is part of Mr Bernanke’s detailed and meticulous plan to ensure that we never return to the deflationary depression of the 30’s – Read here Bernanke’s 2002 speech.

His plan may well work, but at what cost?

One Response to “FOMC divided on when to end purchases”

  1. raul March 3, 2013 at 10:24 am #

    3 march 2013 manila, ph

    economy in an intelligent view,

    “stimulus policy and data pointed to economic
    improvement”

    with high respect to the good chairman,
    i truly admire you sir. i just want to comment.
    i call this stimulus policy as “debt” improvement,
    and definitely not economic improvement.
    this is true and it is a fact.
    i want to say, putting more stimulus to the
    market, to the economy will generate more
    “debt”, and stopping today’s stimulus package
    will guarantee that the market is going to react.
    conclusion there will be no end to this burgeoning
    crisis. stopping it will take all of us to the 2008year
    crisis, and continuing it will also take all of us to
    the 2008year crisis. if only the u.s. government
    really solved, healed the year 2008 crisis, stimulus
    package will bring true-real growth. in chess this
    policies will only and exactly bring a stalemate
    meaning you did not win. i will not wait for a very
    long period of time to witness everything that i had
    written. sir, forgive me to say this is not the right
    way to solve this very huge, enormous economic
    crisis, but rather i would say this is definitely and
    precisely the wrong way. thanks’

    inviting you sir to my facebook account:

    thegreatdepression.part2@yahoo.com

    sir please take care and God bless . . . . . . . raul

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