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.
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?