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Policymakers Split On Ending QE Soon, Fed Minutes Show

Half of Federal Reserve policymakers saw an end to bond buying this year, according to newly released minutes from June's meeting. But Chairman Ben Bernanke said late Wednesday that the central bank could "push back" if financial markets tighten.

Bernanke had said in June that quantitative easing could wind down by mid-2014 if the economy continues to improve, describing it as a consensus view among central bankers who vote on policy. But the minutes revealed a greater divide among all officials including nonvoters.

"About half of these participants indicated that it likely would be appropriate to end asset purchases late this year. Many other participants anticipated that it likely would be appropriate to continue purchases into 2014.

U.S. stocks traded up and down after the minutes came out, ending the day mixed. The 10-year Treasury yield rose 4 basis points to 2.67% — up about 50 ticks since the June meeting.

Gentle Ben

But stock futures rose in after-hours action while bond yields and the dollar fell after Bernanke said policymakers would respond if tighter financial conditions undermine Fed goals.

He added that the current 7.6% jobless rate overstates the labor market's health and reiterated that rates should stay low even after unemployment hits the 6.5% threshold that was set for raising the fed funds rate.

Less-hawkish views also appeared in the June meeting's minutes. Discussion among the Fed officials who will determine the pace of QE this year revealed some concern over the recovery's fragility, possibly adding to reluctance to trim stimulus.

Some policymakers said they need to see more evidence of accelerating growth before tapering QE, noting the projections for a pickup in earlier years didn't materialize.

Some also pointed out that gross hiring remains weak despite decent net payroll gains, wages still lack much upward pressure, long-term joblessness remains elevated, and labor force participation is low.

Housing Impact Key

A couple policymakers also worried about whether higher mortgage rates would curb housing demand. More home loan purchase activity at the time was seen as evidence demand is based on more than just low rates. But purchase loan applications have since fallen to a three-month low as the 30-year mortgage rate hits a 2-year high 4.68%, according to the Mortgage Bankers Association.

Federal budget cuts remain a wild card. Several policymakers said the impact so far has been below expectations but still see the cuts weighing on growth. Federal employee furloughs in the second half of the year will likely hit household income and spending, one predicted.

Fearing the market would deem hints of tapering QE as the start of rate hikes, policymakers said benchmark rates would stay low.

"Many members indicated that decisions about the pace and composition of asset purchases were distinct from decisions about the appropriate level of the federal funds rate," the minutes said.

The overall meeting tone was more hawkish, with concerns focused primarily on how to communicate the Fed's tapering bias, said Steve Blitz, chief economist at ITG Investment Research.

"The hawks have moved in front in terms of controlling the debate," he said.