Fed’s Monetary Policy Remains Unchanged Despite FOMC Seeing Risks of Pro-Longed QE

Michael Teague |

Ben Bernanke, Federal Reserve ChairmanA Federal Reserve staff member on Tuesday accidentally released the minutes of the Federal Open Market Committee meeting from March 19 and 20, prompting the Bank to release the document early itself.

Minutes of the FOMC meetings are closely scrutinized these days, given the centrality of the Federal Reserve’s monetary policy in recent market gains.

Every statement emanating from any representative of the Fed is carefully sifted through for any indications about the future of the quantitative easing program that currently sees the Fed spending $85 billion monthly on assets. Chairman Ben Bernanke and a number of Presidents of regional Federal Reserve banks from around the country have repeatedly stressed that QE will continue until the labor market and the economy as a whole make significant improvements.

The accidental release of the minutes that had originally been slated for a 2pm Wednesday afternoon release occurred on Tuesday, and showed that participants to the meeting “generally judged the macroeconomic benefits of the current purchase program to outweigh the likely costs and risks, but they agreed that an ongoing assessment of the benefits and costs was necessary.”

While the leaked document testified to a sense of moderate optimism over recent economic and market developments in the U.S., and the role of Fed spending and low interest rates, there were some who were “not convinced of the benefits of asset purchases, stating that the effects on financial markets appeared to be short lived or that they saw little evidence of a significant macroeconomic effect.”

The objections to continued QE were based on the potential risks of the sort of open-ended monetary accommodation that seems to have become a fixture of the financial system.

Some objected that asset purchases were exacerbating imbalances and asset prices in the market in general, while apprehension was also expressed regarding the possibility of increased risk-taking that can result from longer-term and artificially low interest rates.

Another worry that was expressed was that the eventual and inevitable withdrawal of QE could backfire on the Fed, as increased net income and remittances to the Treasury resulting from asset purchases dry up for a time.

Despite some apparent objections however, “purchases might well continue at the current pace at least through the end of the year. It was also noted that were the outlook to deteriorate, the pace of purchases could be increased.”

The committee voted 11-1 in favor of continuing its current monetary policy, with the lone dissenter being Esther George, President of the Federal Reserve Bank of Kansas City.

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