News Column

Fed Adopts 'Wait and See' Stance

May 23, 2013

The Federal Reserve's release of the minutes of its last meeting set off stock-market market jitters, as traders reacted to reports that some policymakers favored trimming Fed bond purchases if the economy showed signs of accelerating.

The Dow Jones industrial average fell more than 100 points Wednesday after minutes of the April 30-May 1 meeting of the Fed's policymaking Open Market Committee were released at 2 p.m. The Dow closed down 80.41 points for the day, at 15,307.17.

Economists said the minutes show most Fed officials don't think the economy is strengthening enough to warrant tighter monetary policy.

All but one committee member voted to keep buying bonds at the same $85 billion monthly clip that has helped spur the 16.1% rally in the Standard & Poor's 500-stock index this year.

The full minutes indicate the central bank is likely to keep buying bonds to hold down interest rates until the job market improves substantially. That view was reinforced by Fed Chairman Ben Bernanke in an appearance Wednesday on Capitol Hill -- suggesting the market may have overreacted.

"It's profit-taking," Moody's Analytics chief economist Mark Zandi said. "The market has come a long way. There's nothing in the minutes or the chairman's testimony to change the outlook."

The minutes show most members agreeing that Fed policies will depend on whether upcoming data show the job market strengthening, or whether it's struggling in the face of federal budget cuts and tax increases.

The meeting minutes say that "a number of members expressed willingness" to reduce the rate of purchases as soon as the June 18-19 meeting if there is evidence of "sufficiently strong and sustained growth" in the economy by then. However, "views differed about what evidence would be necessary and the likelihood of that outcome."

"While the markets reacted strongly to this one remark, they seem to have missed (Bernanke's) main message: A premature tightening would endanger the recovery," Bank of America Merrill Lynch economists Michael Hanson and Ethan Harris wrote in a note to clients. "Some members may be more optimistic than others, but until the data warrant it, the status quo should remain."

Only one member of the committee favored slowing down asset purchases immediately, according to the minutes. Others were cautious about the impact of a slowdown in federal spending, plus a spurt of weak economic reports in April, and favored continuing to buy bonds. One advocated buying more bonds to add money to the economy and hold down interest rates, the minutes said.

The trading day shows how sensitive traders are to suggestions the Fed will ease off the gas, analysts said. Stocks rose and bonds fell initially as the market saw Bernanke's prepared remarks. After initial reports on the minutes emphasized the comments about some members being willing to begin tightening soon, stocks dropped.

"If you had any doubts about the influence of the Fed, you only have to look at the roller-coaster that followed Bernanke's testimony this morning and the release to Fed minutes this afternoon," said David Kelly, chief global strategist at J.P. Morgan Funds.

Most economists believe growth will slow in the second quarter after hitting a 2.5% annual rate in the first quarter. In his testimony, Bernanke cited Congressional Budget Office estimates that federal budget policies will shave 1.5 percentage points from economic growth this year.

"The job market remains weak," Bernanke testified. "High rates of unemployment and underemployment are extraordinarily costly: Not only do they impose hardships on the affected individuals and their families, they also damage the productive potential of the economy as a whole by eroding workers' skills."

The Fed's minutes showed several members believed the economy faced more risk of faltering than of expanding faster than the Fed had expected, the minutes said.

"Bernanke did not say anything other than the obvious, which is that in the future, the Fed may scale back or increase (bond buying), depending on whether economic growth is sustainable and if the labor market improves," said Bernard Baumohl, chief global economist of the Economic Outlook Group.

Contributing: Adam Shell

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Source: Copyright USA TODAY 2013

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