US Fed signals end to easy money, street not liking it

ASHINGTON: The Federal Reserve has signaled it may consider slowing the pace of asset purchases as officials extended a debate over whether record monetary easing risks unleashing inflation or fueling asset-price bubbles.

Several participants at the Federal Open Market Committee’s January 29-30 meeting “emphasized that the committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved,” according to the minutes of the gathering released on Wednesday.

Stocks fell, along with oil and gold, on bets the central bank will curb stimulus earlier than expected, even as several Fed officials warned against a premature end to $85 billion in monthly bond buying. A gradual reduction in purchases may win the FOMC’s support because it gives policy makers flexibility, said Michael Hanson, senior US economist at Bank of America .

A number of Federal Reserve officials think the central bank might have to slow or stop buying bonds before seeing the pickup in hiring the programme is designed to deliver, according to minutes of the central bank’s policy meeting last month.

The Fed opted in January to keep buying bonds at an $85 billion monthly pace until the labour market outlook improved substantially, but the minutes on Wednesday showed anxiety over the strategy’s risks — news that sent stocks sharply lower. The S&P 500 suffered its steepest daily percentage decline since mid-November as investors mulled divisions between Fed doves, who want do as much as possible to spur growth, versus colleagues who see merit in a more cautious approach.

The dollar rose after the minutes were released, gold prices hit their lowest level since July and Treasury debt prices advanced, helped by the weaker tone in Wall Street stocks. “The minutes ... portray a Fed whose thinking on the conduct of monetary policy is constantly evolving and shows a committee that is far less unified than at any other time in the past few years,” Millan Mulraine at TD Securities.

The minutes said “many” officials voiced concern over the potential costs of further asset purchases, but the hawkish tone of the policymakers who actually said the policy might need to be scaled back was balanced somewhat by a warning about the dangers of ending the bond-buying programme prematurely.

The evidence of deep internal divisions will heighten investor interest in Fed chairman Ben Bernanke's biannual testimony on monetary policy to two congressional committees next week.