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Fed minutes show many want to end QE stimulus this year

Federal Reserve shows a significant bias toward winding up the QE stimulus program before the stated target of mid-2014
Minutes of the Federal Reserve's last policy board meeting released showed a significant bias toward winding up the QE stimulus program before the stated target of mid-2014.

Minutes of the Federal Reserve's last policy board meeting released Wednesday show many members favored winding up the QE stimulus program well before the mid-2014 target announced by Fed chief Ben Bernanke.

"About half" of the participants in the June 18-19 Federal Open Market Committee meeting thought the quantitative easing program, put in place to hold down interest rates and help economic growth, should be wound up by the end of this year, the minutes said.

Most of the rest were in favor of continuing the $85 billion-a-month bond-buying program into 2014, and after the meeting Bernanke set a timeline that predicted an end to quantitative easing by the middle of next year.

But, even with that divide, the record of the meeting shows that the FOMC, which sets monetary policy, is even more in favor than was understood of pulling back on its easy-money stance, and that tapering the purchases could begin within months.

The split over the timing of ending QE was not a big one, a matter of just about six months.

But that about half of the 19 Fed officials in the meeting wanted to end it this year suggests both rising confidence in economic growth and rising concern about the potential of its easy-money policy to fuel new problems, like a surge in inflation and bubbles in stock, property and other asset markets.

The FOMC meeting was followed with a press conference in which Bernanke laid out, for the first time, the timeline for reeling in the QE bond purchases, after much speculation over the issue.

Bernanke told reporters that, depending on economic conditions, reducing QE bond purchases could begin within months and completely wind up by mid-2014.

The minutes showed the FOMC members were particularly concerned about the market speculation and possible misinterpretation over what the central bank would do with monetary policy, with bond yields having shot up a full one percentage point in the six weeks before the meeting.

Aware of criticisms that the Fed was not being clear in signaling its policy thinking, they wanted Bernanke to stress that tapering the QE program "was conditional on economic outcomes broadly in line with the Committee's expectations."

Crucially, the minutes noted, "many members indicated that further improvement in the outlook for the labor market would be required" before reducing the asset purchases would be merited.

The FOMC was also concerned that markets would interpret the drawdown of QE as the beginning of hikes to the Fed's benchmark interest rate, and Bernanke stressed to reporters that the two were not linked.

Most of the FOMC members expected interest rates to begin rising off their extraordinary low level in 2015, he said.

But the minutes reveal that a growing minority on the panel was also arguing for an earlier tightening of monetary policy to keep any potential inflationary pressures under control.

Four members thought the benchmark rate should be increased this year or next year, and three of those four believed the FOMC needs to act "relatively soon" in order to keep a control on possible inflation.

Analysts said there was little new from the minutes but that the picture of true Fed policy direction remained somewhat hazy, especially after the stronger-than-expected jobs numbers for June, released two weeks after the FOMC meeting.

"The minutes did not provide any additional clarity about the future policy path, but rather sent a somewhat confusing message," said Harm Bandholz, economist at UniCredit.

"Strong payroll gains in June, in combination with upward revisions to the numbers for April and May, might mean that some of the more dovish members, who still were wary of tapering in June, might now be more supportive," he said.