Federal Reserve policymakers are debating how best to bring their massive bond-buying program to a close without spooking markets or otherwise undercutting efforts to boost job creation and bring inflation back to the U.S. central bank's 2 percent goal.
Minutes from their October 29-30 meeting suggest some are open to reducing the Fed's $85-billion-a-month bond-buying program at one of the central bank's next few meetings.
At the same time, the minutes reflect a debate over how to keep policy super-easy even as the central bank announces an end to its third round of quantitative easing, or QE3.
The following are some of the most hotly-discussed possibilities for winding down the asset purchase program and eventually returning near-zero short-term rates to more normal levels, loosely ranked from likeliest to least likely:
PROVIDING BETTER GUIDANCE ON PATH OF RATES: QUITE POSSIBLE
The Fed has said it will keep short-term rates near zero until unemployment falls to at least 6.5 percent and as long as inflation remains in check, but has said little about what it is likely to happen after the threshold is breached. "Several participants" at the October meeting thought it would be helpful to provide more information about the likely path of rates after the threshold is reached. Alternatively they discussed signaling the Fed could keep its short-term policy rate low "for some time" even after rate hikes begin.
LOWERING THE INTEREST THE FED PAYS ON BANKS' EXCESS RESERVES: QUITE POSSIBLE
The Fed pays banks an interest rate of 0.25 percent on their excess reserves. "Most participants" thought lowering that rate "worth considering at some stage." Doing so is seen to be useful mostly as a signal of the Fed's policy intentions, the minutes suggested.
REVERTING TO A CAPPED QE PROGRAM WITH A FIXED END DATE: POSSIBLE
The Fed's current round of quantitative easing differs from its two prior programs in that it is open-ended, with no fixed end-date or set cap on purchases. San Francisco Fed President Williams earlier this month argued for returning to a close-ended program once the job market was on a clear path to further improvement. At the October policy-setting meeting, "some" participants favored announcing a total size for QE3 and a clear timetable for ending it.
ADJUSTING THE THRESHOLDS AT WHICH THE FED WOULD CONSIDER RATE HIKE: POSSIBLE, BUT ONLY BARELY
Minneapolis Fed President Narayana Kocherlakota has long advocated lowering the threshold for considering a rate hike, now at 6.5 percent unemployment, to 5.5 percent. Chicago Fed President Charles Evans has also embraced the idea. Their ranks do not seem to be growing. At the October meeting, the minutes show "a couple" favored such a shift. Others thought doing so would raise credibility concerns.
St. Louis Fed chief James Bullard has argued for setting a floor for inflation, say 1.5 percent, that would need to be reached before any rate hike could be considered; the minutes show "a few" like that approach, but "in general" it was viewed as providing only modest benefits.
MECHANICALLY TRIMMING BOND BUYS AS UNEMPLOYMENT FALLS: UNLIKELY
Fed Governor Jeremy Stein in September floated the idea of reducing the pace of bond-buying in lockstep with improvements in the job market, advocating a plan to trim monthly purchases by a set amount for each tenth-of-a-percentage-point drop in the unemployment rate. At their October meeting, Fed officials "generally expressed reservations" about such an automatic approach.
(Reporting by Ann Saphir, editing by G Crosse)