Some Federal Reserve policymakers are expressing growing concerns that its easy-money policies could stoke inflation, a view that rattled markets Wednesday as investors feared an early end to the economic stimulus.
Fed policymakers agreed to review their $85-billion-a-month bond-buying program when they meet March 19-20, according to minutes of the late-January meeting of the Fed's policymaking group, released Wednesday.
A significant number of Fed policymakers appear to be growing wary of the hazards of expanding the Fed's balance sheet, which now exceeds $3 trillion. "Many" expressed "some concerns about potential costs and risks arising from further asset purchases," the minutes said. They cited inflation and market instability, for example.
The Fed is buying $85 billion a month in long-term Treasury bonds and mortgage-backed securities to hold down long-term interest rates and encourage the purchase of homes, cars and business equipment. Fed policymakers have said they'll continue the purchases until the labor market improves "substantially."
But at the January meeting, "a number" of Fed members said that "an ongoing evaluation of the efficacy, costs and risks" of the purchases could prompt them "to taper or end" the purchases before the job outlook gets substantially better.
"Several others," however, argued the potential costs of reducing or ending the purchases "were also significant," and that they should continue until the labor market picks up markedly.
Even when the Fed reins in the purchases, these policymakers say, it could hold on to the securities and sell them later than expected. That would keep interest rates from rising abruptly.
The split among Fed policymakers isn't new.
At the December meeting, several said the purchases should be stopped by the end of 2013 or well before then.
Economist Conrad DeQuadros of RDQ Economics says it's clear that Fed Chairman Ben Bernanke and a few other pro-growth policymakers are steering decisions and most others support their view.
Kansas City Fed chief Esther George was the lone dissenter to the bond-buying plan in January.
But Paul Edelstein of IHS Global Insight said critics of the Fed are becoming increasingly vocal.
"They're diluting the effectiveness of the program," which depends on the public's confidence that interest rates will stay low, he says.
Edelstein says it's likely the Fed won't begin to scale back the bond purchases until unemployment, now 7.9%, falls to 7.5% next year. But Paul Ashworth of Capital Economics says the latest minutes suggest policymakers could reduce the purchases by midyear and end them by December.
"I think there's been a bit of a rethink here," he said.
In the meeting minutes, Fed officials said the economic outlook "was little changed or modestly improved" since December, as Congress and the White House have headed off big tax increases for most Americans.
At the same time, Congress' failure to lessen looming massive budget cuts "would result in significantly greater drag on economic growth."
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