* A 'clear presumption' of more $10-bln cuts to bond buys
* Officials poised to adjust forward guidance on rates
* Financial stability risks could play role in new language
By Jonathan Spicer
Feb 19 Several Federal Reserve policymakers
wanted to drive home the idea that their asset-purchase program
would be trimmed in predictable, $10-billion steps unless there
is a big economic surprise this year, according to minutes of
their last meeting.
Minutes of the Fed's Jan. 28-29 policy meeting, released on
Wednesday, showed the officials were nearing a decision on how
to adjust a promise to keep interest rates low for a while to
come, including the possibility of incorporating financial
stability concerns in that promise.
At the meeting, which was former chairman Ben Bernanke's
last, the Fed ultimately decided to make another modest cut to
its bond-buying program, which now runs at $65 billion per
month. It made the move despite turmoil at the time in emerging
markets brought on in part by the withdrawal of Fed stimulus.
"Several participants argued that, in the absence of an
appreciable change in the economic outlook, there should be a
clear presumption in favor of continuing to reduce the pace of
purchases by a total of $10 billion at each (policy) meeting,"
the minutes said.
A number of policymakers at the table also said the tapering
plan should however be adjusted if the economy substantially
deviated from expectations.
As it stands, the Fed under its new Chair Janet Yellen aims
to wind down and halt the bond buying later this year. Its next
policy-setting meeting is March 18-19.
RE-WRITING FORWARD GUIDANCE
Beyond the expected cut to bond buying, the Fed at the
January meeting made no changes to its other main policy plank:
its pledge to keep interest rates low for some time to come.
The Fed has promised to keep interest rates near zero until
well after the U.S. unemployment rate, now at 6.6 percent, falls
below 6.5 percent, especially if inflation remains below a 2
The minutes showed Fed officials expect to alter this
guidance soon, given how close the current jobless rate is to
the 6.5-percent rate-hike threshold, and the minutes suggested a
lack of appetite for simply moving the threshold lower.
In what might come as a surprise to some, the officials
raised the possibility that financial-market risks, such as
asset-price bubbles, should play a bigger role in the decision
on when to tighten policy.
"Several participants suggested that risks to financial
stability should appear more explicitly in the list of factors
that would guide decisions about the federal funds rate once the
unemployment rate threshold is crossed.." the minutes said.
Several officials also argued that any refreshed forward
guidance should stress the Fed's "willingness to keep rates low
if inflation were to remain persistently below the Committee's 2
percent longer-run objective."
As it stands, Wall Street economists expect the Fed to keep
rates near zero until around the third quarter of next year, a
prediction that aligns with that of the central bank itself. The
challenge for the Fed is adjusting its forward guidance without
sparking turmoil in bond markets.
BERNANKE'S LAST STAND
The minutes also showed a few officials raised the
possibility of tightening policy "relatively soon," though they
seemed to be in the minority. While the tone of the meeting was
generally upbeat, officials also noted that the turmoil in
emerging markets could threaten U.S. economic growth.
The more hawkish Fed policymakers "will be increasingly
vocal dissenters, but their dissent may fall on deaf ears," said
Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds
The Fed under Yellen is "ultimately going to be just as
dovish in terms of what policies are actually implemented," he
added. "The Chair will have her way."
Some participants in the discussion wanted to amend the
Fed's statement on longer-run goals and monetary policy strategy
to explicitly indicate that inflation running persistently below
the 2-percent target is as undesirable as inflation running
persistently above it.
In the end, however, Fed officials made only minor changes
to the statement, with Fed Board Governor Daniel Tarullo
abstaining on that point because "he continued to think that the
statement had not advanced the cause of communicating or
achieving greater consensus in the policy views of the
Only 10 officials voted on Fed policy in January, but a
broader group of 17 took part in the meeting. It was the first
meeting without a dissent since June 2011, a sign of how
tumultuous Bernanke's tenure has been.