Federal Reserve policymakers late last month expressed explicit and detailed squeamishness over their monetary stimulus, which might be scaled back sooner than the Fed's own guidance suggests, according to minutes released Wednesday.
Policymakers generally agreed last month that the central bank's $85 billion in monthly bond purchases, or quantitative easing, have eased financial conditions and lifted the economy.
"However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases," said the minutes from their Jan. 29-30 meeting.
U.S. stock indexes fell sharply, with the Nasdaq sinking 1.5%.
The Fed has maintained it will continue QE until the labor market improves substantially. But now, "a number of participants" expect it could be trimmed or shut down before substantial job market improvement.
Internal Debate Grows
Some concern over the Fed's open-ended QE, which began in September, was aired during December's meeting. But the latest gathering saw more alarm over possible market distortions, inflation risks, potential balance sheet losses and behavior that might foster financial instability.
In speeches, some Fed officials recently have noted such worries. Kansas City Fed President Esther George, a hawk who dissented at January's meeting, warned of market disruptions when the Fed eventually shrinks its balance sheet, which now tops $3 trillion.
Even the more-dovish Cleveland Fed President Sandra Pianalto said QE may have diminishing effectiveness and could add to risks at financial institutions.
In addition to heightened fears over QE, last month's meeting saw more suggestions for how it could change.
One policymaker said purchases could vary each month depending on the latest economic data. Others raised the possibility of holding assets for a longer period to supplement or replace additional bond purchases.
QE supporters pushed back, arguing that there are significant risks to ending or reducing bond buying. They also favored keeping the original guidance for continued asset purchases.
Talking about QE's risks is prudent and doesn't necessarily mean the Fed will end it early, said Greg McBride, senior financial analyst for Bankrate.com.
With economic output contracting by 0.1% in Q4, income remaining stagnant and steep federal budget cuts looming, he doubts QE will end soon.
"There are plenty of reasons for the Fed to maintain the status quo," he said.
Policymakers' economic views last month were little changed or modestly improved vs. December, helped by reduced strains in global financial markets and the partial fiscal cliff resolution, according to the minutes.
But several members feared long-term harm from ongoing tight credit as well as reduced investment, business formation and technology adoption.
"Many of these participants worried that, should the economy continue to operate below potential for too long, reduced investment and underutilization of labor could further undermine the growth of potential output over time."
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