Fed taper due to jobs growth

An improving US job market convinced Federal Reserve officials to begin scaling back their bond-buying program.

Dow Jones Newswires

An improving United States job market convinced Federal Reserve officials last month to begin scaling back their bond-buying program, despite some scepticism from some worried the recovery might be too fragile, minutes of their December policy meeting showed.

As top policymakers began to see the risks to the economic outlook as increasingly balanced, most agreed that the time was right to cut the bond purchases to $US75 billion a month from $US85 billion. Fed officials have since indicated they expect a steady reduction over the course of this year barring any major economic disruptions.

"Most members agreed that the cumulative improvement in labour market conditions and the likelihood that the improvement would be sustained indicated that the Committee could appropriately begin to slow the pace of its asset purchases at this meeting," according to minutes of the meeting released Wednesday, with the customary three-week lag.

One concern for officials on the Fed's policy committee was low and falling US inflation, which is now well below the central bank's 2 per cent target. Officials repeated that they expected consumer prices would pick up this year along with economic activity, but they appeared less certain about that forecast.

"Inflation was running below the Committee's longer-run objective, and this was seen as posing possible risks to economic performance," the minutes said. "Many members saw a need for the Committee to monitor inflation developments carefully for evidence that inflation was moving back toward its longer-run objective."

Others also expressed concern about indicators of persistent labour market weakness, including low workforce participation.

"For some, considerable slack remaining in the labour market and shortfall of inflation from the Committee's long-run objective warranted continuing asset purchases at the current pace for a time in order to wait for further progress toward those objectives," the minutes said. This suggests the sentiment in favour of trimming bond purchases was not as close to unanimous as the 9 to 1 vote suggested. Seventeen officials participated in the policy discussion, but just ten were voting members..

The Fed was also worried, following a sharp spike in rates during the summer, that its decision to reduce bond buys might be interpreted at moving forward the date of an eventual interest rate increase. Officials went out of their way to reassure markets that this was not the case.

"Many members judged that the Committee should proceed cautiously in taking its first action to reduce the pace of asset purchases and should indicate that further reductions would be undertaken in measured steps," the minutes said.

San Francisco Fed President John Williams on Tuesday indicated the bar for halting the so-called tapering process is fairly high.

The US economy expanded at a 4.1 per cent annualised rate in the third quarter of 2013, and year-end pace of growth appears solid. Average monthly job gains are now just under 200,000, well above where they were when the Fed launched its current round of bond purchases in September 2012.

The minutes stressed that the Fed's bond buys and low-rates policies are contingent not just on the economic backdrop but also based on officials' assessment of their costs and efficacy. One risk is that low rates will lead to asset bubbles, though the central bank did not appear greatly concerned about such a possibility for now.

"Indicators generally suggested that such risks were moderate, in part because of the reduction in leverage and maturity transformation that has occurred in the financial sector since the onset of the financial crisis."