Fed shock decision not to taper QE was 'close call' -minutes

Reuters

* Most participants still saw reduction in bond buys this

year

* Minutes underscore divisions at Fed as Obama picks Yellen

to lead

* Government shutdown, debt ceiling debate clouds outlook

for policy

By Jonathan Spicer and Ann Saphir

NEW YORK/SAN FRANCISCO, Oct 9 (Reuters) - The Federal

Reserve's shock decision last month not to reduce its support

for the U.S. economy was a "relatively close call" for

policymakers, according to minutes of the meeting that also

showed there was still broad support to trim bond-buying this

year.

Since last month's meeting, the outlook for scaling back

bond purchases has grown cloudier.

A budget battle in Washington hit a stalemate and forced a

partial government shutdown that started this month, threatening

economic growth and depriving the Fed of official economic data

to drive its decisions.

The minutes of the Fed's Sept. 17-18 meeting, released on

Wednesday, clearly showed top officials were concerned their

decision to keep buying $85 billion in bonds each month could

muddle their messaging with investors who largely expected a

reduction.

At the conclusion of the much-anticipated meeting, the

decision of the Fed's policy-setting Federal Open Market

Committee sparked a global stock market rally and depressed the

U.S. dollar.

"For several members, the various considerations made the

decision to maintain an unchanged pace of asset purchases at

this meeting a relatively close call," the minutes said of the

10 voting FOMC members.

Referring to the broader group of 17 Fed policymakers, the

minutes said, "most participants judged that it would likely be

appropriate to begin to reduce the pace of the Committee's

purchases of longer-term securities this year and to conclude

purchases in the middle of 2014."

Now that the government shutdown has entered its ninth day,

whether policymakers continue to back tapering this year is an

open question.

"The political landscape has undoubtedly worsened," said

Jacob Oubina, senior U.S. economist, RBC Capital Markets, New

York. "Recent talk from Fed speakers and the political situation

should push tapering out until 2014."

In June, Fed Chairman Ben Bernanke primed markets to expect

a cut to the quantitative easing program (QE) when he said the

central bank expected to make its first policy move later this

year. Yields on U.S. Treasury bonds then mostly rose through the

summer in anticipation of a September cut.

The minutes, which briefly lifted U.S. stocks to session

highs on Wednesday, said Fed policymakers raised concerns about

"the effectiveness of FOMC communications if the Committee did

not take that step."

They also worried it might be difficult to explain a cut to

QE "in coming months absent clearly stronger data on the economy

and a swift resolution of federal fiscal uncertainties," the

minutes show.

After the September meeting, Bernanke said the Fed wanted to

see more evidence of solid economic growth before trimming the

bond-buying, which was launched a year ago and is meant to spur

investment, hiring and economic growth.

Bernanke also emphasized policymakers were not on a preset

course to reduce the program this year, but would do so only if

the job market improved.

U.S. President Barack Obama on Wednesday nominated Fed Vice

Chair Janet Yellen to succeed current Fed Chairman Ben Bernanke,

in a move that investors welcomed because it suggests policy

continuity.

But the minutes underscored how deeply divided policymakers

are, and may yet be if Yellen is confirmed by the Senate as

expected and takes the seat at the head of the policy-setting

table early next year. On Wednesday, she said it was important

that Fed policymakers "vigorously debate, then unite" behind any

given policy response.

The minutes, in typical dry tones, spotlighted the vigor of

the debate, if not the unity of the response.

Some members pointed to mixed economic data, low inflation,

and uncertainty over fiscal policy to back their preference "to

await more evidence that their expectation of continuing

improvement would be realized" before proceeding with a

reduction in bond purchases.

Other participants in the discussion, including non-voting

members, interpreted the data as consistent with an improving

labor market, and urged a small reduction in bond-buying to

follow through with Bernanke's signaled plan. A few of those

said they preferred to scale back Treasuries purchases, which

make up $45 billion of the monthly buying program.

Since Oct. 1, when the government shutdown began, the Fed's

ability to gauge the state of the economy has been somewhat

impaired. For instance the latest read on the nation's

unemployment rate, 7.3 percent, dates from August; September's

figure would normally have been released last week.

The standoff also threatens to slow the economy further as

government workers lose income and investors fret about whether

lawmakers will precipitate a national debt default if they do

not raise the U.S. debt limit by Oct. 17, when the government is

expected to run out of money to pay its bills.

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