WASHINGTON Many Federal Reserve officials earlier this month wanted to see more evidence that the economy was recovering before shifting toward a tapering of their bond purchase program, the Fed said on Wednesday.
"Most observed that the outlook for the labor market had shown progress since the program was started in September," according to minutes of the central bank's April 30-May 1 meeting.
"But many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate."
At the meeting, the Fed voted to keep buying bonds at a $85 billion monthly pace. The policy committee next meets on June 18-19. Fed Chairman Ben Bernanke, providing a peek into his thinking, told Congress on Wednesday that the economy needed to gain more traction before the Fed tapered its bond buying.
In a sign of divisions on the policy-setting committee, the minutes highlighted an active debate over how soon the Fed should start to scale back its bond-buying stimulus.
"A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth," they said.
The U.S. central bank has held interest rates near zero since late 2008 and more than tripled the size of its balance sheet through massive bond purchases in an aggressive effort to restore the economy after the severe 2007-2009 recession.
Critics warn this could fan future inflation and financial instability, and a few Fed policy-makers expressed concern that conditions were becoming too buoyant in some markets, including for lower-credit corporate bonds.
On the other hand, the minutes characterized U.S. economic data as mixed, with the Fed's preferred gauge of inflation running below its 2 percent goal. While they noted expectations for future inflation had remained stable, policy-makers stressed that low inflation bore careful watching.
"A couple of participants expressed the view that an additional monetary policy response might be warranted should inflation fall further," the Fed said.
Officials also reviewed their blueprint, now two years old, for an eventual exit from their ultra-easy monetary policy, but came to no firm conclusions on how they might proceed beyond the need to maintain flexibility.
The strategy was in need of discussion because the Fed's balance sheet, at $3.3 trillion, is now much larger than envisaged when the initial review was undertaken in June 2011.
Back then, the Fed envisaged a series of stages in its efforts to normalize policy. It would stop buying bonds, modify its guidance on how long interest rates would stay low, drain bank reserves from the system, then begin raising rates, and finally start selling bonds from its balance sheet.
"The broad principles adopted almost two years ago appeared generally still valid, but developments since then - including the change in the size and composition of ... asset holdings — suggested a need for greater flexibility regarding the details of implementing policy normalization," it said.
(Reporting by Alister Bull and Pedro da Costa; editing by Tim Ahmann and Chizu Nomiyama)